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MARKETING 

ITS  PROBLEMS 
AND  METHODS 


MARKETING 

ITS    PROBLEMS 
AND    METHODS 


BY 

C.  S.  DUNCAN,  Ph.D. 

SOMETIME    ASSISTANT  PROFESSOR  OF  COMMERCIAL 
ORGANIZATION    IN    THE    UNIVERSITY    OF    CHICAGO 


ILLTJSTBATED 


D.  APPLETON  AND  COMPANY 

NEW  YORK  LONDON 

1921 


COPYRIGHT,    1920,    BY 

D.  APPLETON  AND  COMPANY 


ABUTTED   IH   THE  UNITED  STATES  OF  AMEBIOA 


13  1>9| 


PREFACE 

This  book  has  been  written  to  meet  the  need  in  schools 
and  colleges  for  a  text  covering  the  general  methods  and 
problems  of  marketing  raw  materials,  farm  products  and 
manufactured  goods.  A  broad  survey  of  these  methods  and 
problems  is  a  necessary  foundation  for  more  specialized 
studies,  for  the  same  reason  that  a  broad  survey  of  eco- 
nomic principles  should  precede  courses  in  banking,  trans- 
portation, or  labor  problems. 

Raw  materials  and  farm  products  form  the  best  means 
of  studying  marketing  methods  functionally.  The  distribu- 
tive machinery  for  handling  them  is  not  only  more  complex 
than  that  for  manufactured  goods,  but  the  activities  are 
also  more  highly  specialized,  and  the  functions  more  clearly 
defined.  For  this  reason,  the  discussion  in  Part  I  deals 
with  the  marketing  of  these  commodities  from  a  functional 
point  of  view. 

The  marketing  of  manufactured  products  presents  a 
series  of  problems  so  complex,  so  distinct  in  character,  and 
yet  so  immediate  and  practical  in  every  way,  that  it  may 
be  studied  by  the  ''problem  method."  It  is  for  this  rea- 
son that  Part  II  treats  the  marketing  of  finished  products 
largely  by  meanS  of  a  progressive  series  of  problems. 

In  this  way  variety  is  secured  without  losing  sight  of 
the  fact  that  the  entire  economic  process  is  a  more  or  less 
continuous  one.  Influences  affecting  the  marketing  of  raw 
materials  and  farm  products  are  often  reflected  in  the  mar- 
keting of  finished  goods.  The  reverse  is  also  true.  The 
method  of  presentation  in  this  discussion  takes  due  cog- 
nizance of  this  fact. 


vi  PREFACE 

There  is  to  be  found  in  this  book  something  more  than  a 
mere  description  of  the  existing  distributive  organization. 
The  analysis  goes  deeper  than  this,  and  isolates  and  de- 
fines causes  and  influences.  It  aims  in  a  real  sense  to  be  a 
book  of  "applied"  economics.  The  historical  background 
is  given  whenever  needed  for  an  understanding  of  problems 
or  functions,  but  history  and  description  are  alike  second- 
ary considerations.  Illustrations  are  here  in  abundance 
to  furnish  evidence  and  to  make  the  discussion  concrete. 
It  may  be  said  that  the  primary  purpose  is  by  means  of  a 
descriptive  analysis  to  translate  facts  into  principles. 

Most  of  the  material  for  this  book  has  been  accumulated 
through  years  of  teaching  classes  in  marketing,  and  of  in- 
vestigating practical  problems.  The  method  of  approach 
has  thus  been  thoroughly  tested,  both  from  a  pedagogical 
and  from  a  practical  point  of  view.  In  general  outline,  the 
method  is  very  simple,  consisting  of  three  essential  parts : 
(1)  analysis  of  the  commodity,  (2)  the  analysis  of  the 
market,  and  (3)  the  anatysis  of  the  trade  organization. 
It  has  the  two  merits  of  simplicity  and  unassailable  logic. 
The  writer  believes  that  he  has  been  able  to  put  the  con- 
tent of  fact  into  the  outline  and  has  given  significance  to 
this  analysis. 

The  writer  has  drawn  material  from  various  publications. 
Acknowledgment  of  this  fact  has  been  made  at  the  appro- 
priate places.  Suggestions  for  the  underlying  analysis  will 
be  found  in  a  series  of  lectures  given  years  ago  by  Mr. 
MacMartin  at  the  University  of  Minnesota.  It  was  inevi- 
table that  as  a  teacher,  the  writer  should  have  profited  by 
the  work  of  his  students,  and  for  this  invaluable  aid  he 
desires  to  give  due  credit.  For  criticism  and  helpfulness  in 
many  ways  the  writer  is  indebted  to  his  wife,  Beatrice  S. 
Duncan.  For  making  the  index  he  is  under  obligation  to 
Margaret  S.  Merwin. 

C.  S.  Duncan 


CONTENTS 

Preface v 

CHAPTER 

I.     Introduction 1 

1.  Definition 1 

2.  Commercial  Organization  in  the  Economic  Process  2 

3.  Relation  of  Commercial  Organization  to  Commercial 

Geography 4 

4.  Study  of  Commercial  Organization  More  than  a  Study 

of  Merchandising 5 

5.  Functions  and  Institutions 6 

6.  Institutional  and  Functional  Analysis        ....  7 

7.  Commodity  Analysis 8 

8.  Types  of  Economic  Goods 9 

9.  Raw  Materials  and  Foodstuffs 9 

10.  Manufactured  Goods 10 

11.  Business  Facts  and  Business  Principles      ....  11 

12.  Commercial  Problems  and  Business  Research       .     .  12 

13.  Commerical  Problems  and  Statistics 13 

14.  Commercial  Problems  and  Economic  Theory       .      .  13 

15.  Commercial  Problems  and  Business  Management      .  13 

16.  History  of  Commerce 14 

17.  Commercial  Law 14 

18.  Educational  Value  of  Commercial  Study   ....  15 

PART  I 

RAW  MATERIALS  AND  FOODSTUFFS 

II.    Analysis  of  the  Commodity 21 

19.  Purpose 21 

20.  Method 21 

21.  Characteristics  of  the  Commodity 22 

22.  New  or  Established  Commodity 22 

23.  Necessity  or  Luxury 23 

24.  Staple  or  Novelty     _ ...  24 

25.  Perishable,  Semi-perishable,  Non-perishable    ...  25 

26.  Dependability  of  Supply  of  Commodity     ....  26 

27.  Control  of  Supply 28 

28.  Substitutes 29 

29.  Units  of  the  Commodity 29 

30.  Requiring  or  Not  Requiring  Preparation    ....  30 

31.  Independent  or  Group  Product 31 

32.  Varieties,  Species,  etc 31 

vii 


viii  CONTENTS 

CHAPTER  PAGE 

33.  Physical  and  Chemical  Tests 32 

34.  Supply  of  Commodity 33 

35.  Means  of  Production 34 

36.  Geographical  Location  of  Producing  Regions  ...  36 

37.  Historical  Survey  of  Producing  Regions     ....  37 

38.  Characteristics  of  Producing  Regions  ....  38 

39.  Volume  of  Production 40 

40.  Value  of  Output 40 

41.  "Visible  Supply" 40 

42.  Conclusion 42 

III.  Analysis  of  the  Market 42 

43.  The  Market 42 

44.  Geographical  Location  of  Market  Centers       ...  43 

45.  Boundaries  and  Overlapping  of  Market  Areas      .      .  48 

46.  Market  Competition 49 

47.  Consumer  Demand  in  Relation  to  Market  Centers    .  50 

48.  Character  of  Market  Demand 50 

49.  Character  of  Market 52 

50.  Historical  Considerations 53 

51.  Climatic  Considerations 56 

52.  Seasonal  Considerations 56 

53.  Financial  and  Market  Relationship 57 

54.  Conclusion 58 

IV.  Trade  Organization 61 

55.  Functions  and  Institutions 61 

56.  Market  Functions 62 

57.  The  Middleman 64 

58.  The  Transportation  Function 65 

59.  Organized  Exchanges 65 

60.  The  Warehousing  Industry 65 

61.  Commercial  Grading  and  Inspection      ....  65 

62.  Market  News 66 

63.  Market  Price 66 

64.  Financing  Distribution 67 

65.  Trade  Organizations  Modified  by  Commodity      .      .  68 

66.  Strategic  Points  in  Marketing 69 

67.  Trade  Organization  Chart 71 

68.  Types  of  Trade  Organization 72 

69.  Typical  Organization  Charts 81 

70.  Flexibility  of  Trade  Organization 82 

71.  Conclusion 85 

V.  The  Middleman 87 

72.  Who  the  Middleman  Is 87 

73.  Development  of  Middleman  Functions      ....  88 

74.  Buyers  and  Sellers  in  the  Local  Market     ....  94 

75.  Buyers  and  Sellers  in  the  Wholesale  Trade      ...  96 

76.  The  Retail  Trade 102 

77.  Tendency  to  Eliminate  Middlemen 104 

78.  Outstanding  Problems .  105 


CONTENTS  ix 

CHAPTEB  PAGE 

VI.    Transportation 107 

79.  Transportation  as  a  Commercial  Problem       .     .     .  107 

80.  Transportation  to  Local  Market 110 

81.  Transportation  to  the  Primary  Market      .      .      .      .  113 

82.  Transportation  to  Terminal  Markets 117 

83.  Rate  Districts 117 

84.  New  England  Rate  District 119 

85.  Trunk  Line  and  Central  Traffic  District      .      .      .  119 

86.  Trans-Mississippi  and  Trans-Missouri  District     .  120 

87.  Southeast  Rate  District 120 

88.  Texas  Rate  District      ....  ....  121 

89.  Pacific  Coast  and  Transcontinental  Rates  .      .      .  122 

90.  Classification  Rates 122 

91.  Commodity  Rates 123 

92.  Terminal  Charges 124 

93.  Special  Cars 125 

94.  Car  Supply  and  Routing 126 

95.  Demurrage 128 

96.  Trolley  Lines 129 

97.  Motor-Truck  Lines 130 

98.  Conclusion 130 


VII.    Organized  Exchanges 134 

99.  What  an  Organized  Exchange  Is         134 

100.  Functions  of  Organized  Exchanges 135 

101.  Produce  Exchanges 138 

102.  Grain  Exchanges 140 

103.  The  Cotton  Exchange 142 

104.  The  Coffee  Exchange 145 

105.  Butter  and  Egg  Board 146 

106.  Stockyards 146 

107.  Wool  Market 149 

108.  Iron  and  Steel  Institute 150 

109.  Sugar  Exchanges 151 

110.  The  Auction 152 

111.  Cooperative  Organization 154 

112.  Municipal  Markets  . 155 

113.  Speculation  as  a  Commercial  Problem      ....  155 

114.  Conclusion 157 


VIII.    The  Warehouse 159 

115.  Recent  Developments  in  Warehousing     ...      .159 

116.  Functions  of  the  Warehouse 163 

117.  Economic  Advantages  of  the  Warehouse        .      .      .  165 

118.  Types  of  Warehouses 166 

119.  The  General  Mercantile  Warehouse 166 

120.  The  Bonded  Warehouse 168 

121.  The  Grain  Elevator 168 

122.  Cotton  Warehouses 171 

123.  Wool  Warehouses 173 


x  CONTENTS 

CHATTEB  ,  PAOK 

124.  Tobaoco  Warehouses 174 

125.  Cold  Storage 175 

126.  Stockrooms 178 

127.  Warehousing  Problems 179 

128.  Place  of  Warehouse  in  Commercial  Organization     .  180 

IX.  Commercial  Grading  of  Commodities 183 

129.  The  Need  of  Uniform  Standards 183 

130.  Commercial  Function  of  Grading 184 

131.  Scientific  Analysis  as  a  Basis  for  Grading      .     .     .  187 

132.  Machinery  for  Grading 188 

133.  Commercial  Units  and  Standards 189 

134.  Wheat 190 

135.  Corn 193 

136.  Cotton 194 

137.  Potatoes 195 

138.  Hides  and  Skins 197 

139.  Lumber 198 

140.  Apples ....  199 

141.  Tendency  to  Grading  and  Effect  on  Commodity      .  199 

142.  Effects  upon  Trade  Organization 201 

143.  Grades  and  Prices 201 

144.  Responsibility  for  Standard  Grades 202 

145.  Grading  and  Packing 203 

X.  Trade  Information 205 

146.  What  Is  Trade  Information? 205 

147.  Function  of  Market  News 207 

148.  Organization  for  Securing  Market  Information  .     .  209 

149.  Governmental  Organizations 209 

150.  Private  Organizations 213 

151.  Essentials  of  Market  News 217 

152.  Control  of  Trade  Information 218 

153.  Discounting  the  Future 219 

154.  Trade  Information  and  Competition 220 

155.  Use  and  Abuse  of  Trade  Information       ....  221 

156.  Market  News  as  a  Business  Force       .....  222 

XL    Market  Price -  .'•   .  225 

157.  Price  Factors  and  Influences 225 

158.  Local  Market  Price 228 

159.  Primary  and  Terminal  Market  Price 230 

160.  Retail  Prices 235 

161.  Price  Quotations 239 

162.  Price  "  Steps "  or  Intervals 241 

163.  Sympathetic  Prices 241 

164.  The  "Spread" 242 

165.  Price  Fixing 243 

166.  Fair  Price 244 

167.  Prices  and  Costs 246 


CONTENTS  xi 

CHAPTEB                                                                                    ,    ,                 f  PAGE 

XII.  Financing  Distribution        .     .     . '   .     .     .     .     .     .  248 

168.  The  Relation  of  Finance  to  Marketing     .     '. »    .     1  248 

169.  Methods  of  Sale 7  248 

170.  The  Check 250 

171.  Bill  of  Exchange 251 

172.  Bill  of  Lading 254 

173.  The  Warehouse  Receipt 264 

174.  The  Trade  Acceptance 268 

175.  Functions  of  Credit  Instruments 270 

PART  II 
MANUFACTURED  PRODUCTS 

XIII.  Analysis  op  the  Commodity 277 

176.  Differences  Between  Raw  Materials  and  Finished 

Goods 277 

177.  Historical  Development 278 

178.  Philosophical  Analysis 280 

179.  Analysis  Dependent  on  Point  of  View      .     .     .     .281 

180.  Character  of  Demand 284 

181.  Supply  of  Commodity 288 

182.  Analysis  a  Middleman  Function 291 

183.  Analysis  and  Grading 292 

184.  Analysis  and  the  Market 293 

■ 

XIV.  Analyzing  the  Market 295 

185.  Some  Aspects  of  Market  Analysis 295 

186.  Trade  Geography 296 

187.  Historical  Considerations 298 

188.  Market  Units 300 

189.  Social  Elements  in  the  Market 301 

190.  Population  Movements 303 

191.  Population  Analysis 304 

192.  Incomes 306 

193.  Budgets 307 

194.  Individual  Items 309 

195.  Shifting  Demand 310 

196.  Form  and  Scope  of  a  Market 311 

197.  Financial  and  Trade  Conditions 312 

198.  The  Human  Element 313 

XV.  The  Distributive  Organization 315 

199.  Character  of  Distributive  Organization    ....  315 

200.  Development  of  Distributive  Organization    .     .     .  317 

201.  Channels  of  Distribution 325 

202.  Choosing  Proper  Agencies 330 

203.  Types  of  Trade  Organization 332 

204.  Chaos  in  Trade  Organization 337 


xii  CONTENTS 

CHAPTER  PAGE 

XVI.  "New  Type"  Retailers 340 

205.  Regular  Versus  New  Type  Retailer 340 

206.  The  Department  Store 341 

207.  The  Chain  Store 347 

208.  The  Mail-Order  House 351 

209.  The  Manufacturer's  Branch  Store 355 

210.  The  Cooperative  Stores 357 

211.  Cooperative  Buying 358 

212.  Conclusion 359 

XVII.  Business  Policies 362 

213.  What  the  Business  Policy  Is 362 

214.  The  House  or  Store  Policy 362 

215.  General  Price  Problem 364 

216.  Calculating  Price  Percentages 36S 

217.  Maintained  Prices 369 

218.  Commercial  Phase 370 

219.  Legal  Phase 372 

220.  Problem  of  Credit 374 

221.  Unfair  Competition 377 

222.  Price  Cutting      . 379 

XVIII.  Defending  and  Extending  the  Market  .     .     .*    .  384 

223.  The  Problems  of  Market  Extension 3S4 

224.  Scope  and  Character  of  Market 385 

225.  Analyzing  the  Appeal 386 

226.  Appearance  of  Commodity  Unit 387 

227.  Identification  of  Commodity 393 

228.  Trade  Names 394 

229.  Trade-Marks 396 

230.  Plant  or  Store  as  Appeal  Asset 399 

231.  Potential  Markets 401 

XIX.  The  Sales  Organization -    .     t     .  405 

232.  The  Importance  of  a  Sales  Organization  ....  405 

233.  The  Sales  Manager 406 

234.  Personnel  Department 407 

235.  Selecting  the  Sales  Force 407 

236.  Training  the  Sales  Force 409 

237.  Holding  Sales  Conventions 413 

238.  Disciplining  the  Sales  Force 413 

239.  Advertising  Department 413 

240.  Sales-Promotion  Department 414 

241.  Keeping  Records 414 

242.  Coordinating  the  Force 415 

243.  Advertising  Manager 416 

244.  Advertising  Agency 417 

245.  Research  Department 419 

246.  Sales  Conferences 419 

247.  General  Considerations  of  Salesmanship  ....  420 


CONTENTS  xiii 

CHAPTEB  "OB 

XX.    Economics  op  Advertising 426 

248.  The  Study  of  Advertising  Media 426 

249.  What  Is  Advertising? 427 

250.  Character  of  the  Commodity  and  Advertising     .      .  429 

251.  Character  of  Market  and  Advertising       ....  430 

252.  Size  of  Market  and  Advertising 432 

253.  Selection  of  Media 432 

254.  Newspapers 433 

255.  Magazines 435 

256.  House  Organs 437 

257.  Business  Letters 438 

258.  Outdoor  Advertising 439 

259.  Street-Car  Advertising 439 

260.  Window  Displays 441 

261.  Catalogues 442 

262.  "Dealer  Helps" 443 

263.  Demonstrators 443 

264.  Checking  Up  Returns 444 

XXI.  Merchandising  Costs  and  Prices 448 

265.  Factors  of  Expense 449 

266.  Commissions  for  Jobbers  and  Brokers      ....  452 

267.  Who  Pays  for  Advertising? 453 

268.  Buying  Advertising  Space 455 

269.  Price  Influences 456 

270.  Price  Systems 462 

271.  Profits 463 

272.  One-Price  Policy 464 

273.  List  Price 464 

274.  Discounts 464 

275.  Seasonal  Prices 465 

276.  Speculative  Prices 465 

277.  Transportation  Charges 465 

XXII.  Merchandising  and  Social  Control 469 

278.  The  Forces  of  Social  Control 469 

279.  Enforced  Competition 470 

280.  Protecting  Standards 471 

281.  Protecting  Rights 472 

282.  Enforcing  Honesty 473 

283.  Price  Control 475 

284.  Public  Utilities 476 

285.  Methods  of  Control 476 

286.  By  Enacting  Laws      . 476 

287.  By  Licenses  or  Examinations 477 

288.  By  Taxation 477 

289.  By  Force  of  Example 478 

290.  By  Group  Action 478 

291.  By  Publicity 479 

292.  By  Limiting  Profits 480 


xiv  CONTENTS 

PAGE 

293.  By  Boycotting 480 

294.  By  "Suggesting"  Prices 480 

295.  Machinery  for  Control 481 

296.  Governmental  Machinery 481 

297.  Private  Machinery 483 

298.  Conclusion 484 

Index 487 


ILLUSTRATIONS 

MSI 

Chart  of  Channels  of  Food  Distribution 70 

Market  Organization  Chart  for  Farm  Products 71 

Market  Organization  Chart  for  Bituminous  Coal 81 

Market  Organization  Chart  for  Pig  Iron 82 

Market  Organization  Chart  for  Cane  Sugar       .......  83 

Market  Organization  Chart  for  Antimony  Ore 84 

Map  of  Railroad  Freight  Classification  Territories  and  Freight 

Traffic  Association  Territories 118 

Chart  of  the  Auction  System  of  Handling  Produce       ....  153 

Charts  Showing  Effect  of  Cold  Storage  on  Butter  and  Egg  Prices  234 
Charts  Showing  the  Effect  of  Price  Fixing  During  the  War     .  244,  245 

Bill  of  Exchange,  with  Endorsements 253 

Warehouse  Receipt 267 

Trade  Acceptance 270 

Market  Organization  Chart  for  Shelf  Hardware 334 

Market  Organization  Chart  for  Farm  Implements 336 


XV 


MARKETING 

ITS  PROBLEMS 
AND  METHODS 


CHAPTER  I 


INTRODUCTION 


1.  Definition. — Commercial  organization  is  to  be  dis- 
tinguished from  both  business  organization  and  industrial 
organization.  Business  organization  is  the  general  term  for 
the  entire  economic  system  of  production  and  distribution ; 
it  is  correlative  with  the  term  profession  or  diplomacy,  just 
as  one  speaks  of  the  professional  man,  the  business  man, 
or  the  diplomatist.  Of  this  general  term  commercial  orga- 
nization is  a  part,  but  a  part  only.  From  industrial  orga- 
nization it  differs  in  that  it  has  to  do  with  the  actual  dis- 
tribution of  goods,  the  buying  and  selling  process,  while 
industrial  organization  deals  with  the  manufacturing  proc- 
ess. The  terms  most  nearly  synonymous  with  commercial 
organization  are  marketing  and  merchandising.  Market- 
ing, however,  has  local  and  provincial  meanings,  illustrated 
by  "to  go  marketing,"  "to  do  the  marketing,"  that  mar 
its  effectiveness  for  the  more  general  meaning.  Merchan- 
dising is  being  specialized  to  indicate  the  bargaining  process 
between  buyer  and  seller,  and  is  becoming  synonymous  with 
salesmanship.  Commercial  organization  as  used  here,  then, 
means  the  mechanisms  and  devices  in  modern  industrial 
society  for  the  actual  transfer  of  economic  goods,  whether 

1 


2  MARKETING 

by  wholesale  or  retail,  from  one  party  to  another,  on  their 
way  from  origin  to  consumption.  A  study  of  commercial 
organization  is,  therefore,  a  study  of  marketing  problems 
and  methods. 

In  the  discussion  of  economic  theory,  commercial  orga- 
nization becomes  a  part  of  distribution,  but  overlaps  into 
production.  From  a  broad  point  of  view,  there  are  but 
two  parts  of  the  economic  process;  one  is  production,  the 
other,  consumption.  If  the  creation  of  value  is  the  essence 
of  production,  then  the  distributive  process,  since  it  does 
add  value  to  economic  goods,  is  a  part  of  production.  The 
best  means  of  keeping  the  meaning  clear  is  to  think  of 
economic  goods  moving  from  their  source  to  the  doors  of 
the  factory,  or  to  the  consumer,  and  from  the  doors  of 
the  factory  to  consumer,  through  the  mechanism  of  com- 
mercial organization.  It  includes  all  of  the  processes  of 
transportation,  storing,  weighing,  grading,  buying,  selling, 
etc.  Commercial  organization  has  to  do  primarily  with 
the  activities  of  the  merchant;  industrial  organization  has 
to  do  primarily  with  the  activities  of  the  manufacturer. 

2.  Place  of  Commercial  Organization  in  the  Economic 
Process. — All  economic  goods  move  in  a  more  or  less  con- 
tinuous process  from  origin  to  consumer.  Some  steps  of 
the  process  are  often  simultaneous,  as,  for  instance,  when 
goods  are  bought  and  sold  in  transit  or  during  manufacture, 
or  when  the  merchant  stores  his  consignments  of  goods 
at  the  beginning  of  a  season.  There  is  no  absolutely  clear- 
cut  line  of  demarcation  between  industrial  and  commercial 
organization.  Industrial  and  commercial  problems  are, 
therefore,  interlacing.  The  manufacturer,  in  locating  his 
plant,  will  have  to  consider  the  problem  of  transportation, 
of  buying  his  raw  materials,  and  of  selling  his  product. 
These  are  commercial  problems.  The  merchant  will  need 
to  consider  the  location  of  his  store  or  warehouse,  the  con- 
struction and  equipment  of  his  plant,  the  processing  or 


INTRODUCTION  3 

routing  of  his  goods,  and  the  management  of  his  labor  force. 
These  problems  are  usually  treated  as  production  problems. 
The  general  relationship  of  commercial  activities  to  the 
other  economic  activities  may  be  visualized  by  means  of 
the  following  diagrammatic  sketch : 


I 

II 

III 

IV 

V 

Raw 
Materials 

Extractive 
Industries 

Commercial 
Organization 

Manufacturing 
Industries 

Commercial 
Organization 

Consumer 
Demand 

Transportation 

Financing 

It  will  be  seen  by  this  diagram  that  commercial  organiza- 
tion always  stands  between  the  goods  and  the  market.  The 
extractive  industries  may  be  farming,  mining,  forestry,  or 
fishing.  If  the  products,  thus  derived,  are  not  for  direct 
consumption,  if  they  are  to  go  to  the  market,  or  if  they 
are  to  be  bought  and  sold,  then  commercial  problems  arise. 
The  manufacturer  must  buy  his  materials  or  reach  back 
to  their  source  and  control  the  intervening  commercial 
process  himself.  And  when  the  same  manufacturer,  with 
his  materials  fabricated,  looks  out  toward  his  market,  he 
faces  once  more  the  need  of  commercial  organization  and 
commercial  problems. 

In  fact,  commercial  problems  are  the  most  fundamental 
of  all  business  problems.  The  alpha  and  the  om&ffa  of  the 
business  process  is  merchandising,  buying  and  selling.  The 
manufacturer,  as  well  as  the  merchant,  has  his  purchasing 
department  and  his  sales  department.  He  buys  his  raw 
materials ;  he  sells  his  finished  product.  The  beginning  of 
every  business  process  is  buying ;  the  end  of  every  business 
process  is  selling,  or  consumption.  The  problem  of  demand 
is  a  commercial  problem;  the  problem  of  supply  is  a  com- 
mercial problem.    These  statements  hold  true  for  abstract 


4  MARKETING 

economic  goods,  like  services,  as  well  as  for  concrete  eco- 
nomic goods,  like  shoes. 

Furthermore,  it  will  be  observed  from  the  above  diagram 
that  some  economic  activities  are  pervasive.  The  problem 
of  transportation  is  not  confined  to  the  merchant  or  the 
manufacturer.  It  is  a  part  of  the  entire  economic  process. 
AYhy  are  railroads  called  public  utilities,  i.e.,  private 
property  devoted  to  public  service?  Because  transporta- 
tion is  a  necessary,  fundamental  activity  to  the  entire  busi- 
ness organization.  What  affects  it,  affects  the  welfare  of 
all  men ;  it  is,  in  fact,  a  public  service.  In  the  same  way, 
financing  is  a  pervasive  process,  and  the  welfare  of  all  men 
is  involved.  Hence,  the  special  laws  to  regulate  banks. 
Possibly  insurance,  as  it  is  developing  in  these  latter  days, 
will  have  to  be  added  to  this  list. 

This  discussion  shows  in  a  general  way  where  commercial 
organization  belongs  in  the  course  of  business  activity. 
It  stands  between  the  manufacturer  and  his  supply  of  raw 
materials;  it  stands  between  him  and  the  market  for  his 
finished  goods.  The  same  principle  holds  where  the  raw 
materials  of  one  manufacturer  are  the  finished  products 
of  another,  as  for  instance,  pig  iron,  or  steel  ingots,  or 
steel  plates,  or  the  entire  list  of  semi-manufactured  goods. 
It  holds  true  also  of  that  vast  volume  of  foodstuffs  which 
do  not  pass  through  the  process  of  fabrication  on  their  way 
to  the  consumer. 

3.  Relation  of  Commercial  Organization  to  Commercial 
Geography. — The  beginning  of  wisdom  in  a  study  of  com- 
mercial organization  is  a  knowledge  of  natural  resources. 
That  is  to  say,  a  prerequisite  for  a  discussion  of  commercial 
problems  is  a  course  in  commercial  geography.  The  whole 
framework  of  trade  has  shaped  itself  to  meet  the  difficulties 
and  to  make  the  most  of  the  advantages  of  every  geographic 
region.  It  is  always  modified  by  historical  considerations 
and  by  tradition,  but  in  the  slow  process  of  time  it  adjusts 


INTRODUCTION  5 

itself  to  facilitate  in  the  best  possible  way  the  distribution 
of  economic  goods.  The  trade  problems  of  the  United 
States  rest  upon  the  physical  basis  of  natural  resources  and 
commercial  organization  has  adjusted  itself  to  the  physio- 
graphic helps  and  obstacles  to  the  flow  of  trade.  These 
problems  of  trade  cannot  be  intelligently  discussed  except 
in  connection  with  the  location  of  mineral  and  ore  deposits, 
coal  beds,  oil  basins,  and  great  trade  centers;  the  courses 
of  important  streams,  especially  the  navigable  ones;  the 
network  of  railways;  the  coastwise  and  lake  trade  routes; 
the  corn  and  cotton  belts;  the  wheat  growing  regions;  the 
grazing  ranges;  and  the  general  population  movements. 

It  is  necessary  to  have  a  panoramic  view  of  the  economic 
situation  as  a  preliminary  to  a  detailed  discussion  of  indi- 
vidual problems.  Such  a  bird's-eye  view  can  best  be  had 
through  a  study  of  geography,  in  both  its  commercial  and 
its  industrial  aspects.  Our  new  interest  in  foreign  trade 
has  revealed  an  appalling  ignorance  of  geography,  even 
among  those  who  have  transacted  business  beyond  the  bor- 
ders of  our  country.  A  much  denser  ignorance  probably 
prevails  among  those  who  have  not  given  attention  to  ques- 
tions beyond  their  immediate  business  affairs  in  local  mar- 
kets. The  interlocking  character  of  modern  business  de- 
mands a  broader  outlook  for  the  future.  Commercial 
organization,  as  discussed  here,  assumes  a  good  general 
knowledge  of  commercial  geography. 

4.  .Study  of  Commercial  Organization  More  than  a 
Study  of  Merchandising. — A  study  of  the  problems  of  com- 
merce is  more  than  a  study  of  the  art,  or  science,  of  buying 
and  selling ;  that  is,  of  merchandising,  in  the  sense  of  making 
a  bargain,  of  ' '  putting  through  a  deal, "  of  "  higgling  in  the 
market."  Its  scope  is  much  broader,  and,  in  a  true  sense, 
more  fundamental.  The  act  of  buying  or  of  selling  advan- 
tageously is  the  consummation  devoutly  to  be  wished ;  it  is 
the  culmination  of  a  process.  This  is  a  matter  of  human  con- 


6  MARKETING 

tact,  and  it  is  shot  through  and  through  with  psychological 
problems.  A  most  important  step  it  is,  but  nevertheless 
only  a  part  of  the  journey. 

No  broad,  sound  business  policy  can  be  developed  from 
a  study  merely  of  this  merchandising  function.  A  far 
broader  basis  than  shrewd  bargaining  is  needed  for  really 
good  business.  No  lawyer  would  dare  to  enter  the  court 
room  with  a  knowledge  only  of  the  case  in  hand,  however 
thorough  that  knowledge  might  be.  Rather  has  he  studied 
this  case,  not  only  in  itself,  but  also  as  related  to  many 
other  eases,  to  decisions  of  other  analogous  cases,  and  par- 
ticularly in  relation  to  the  principles  of  law  involved.  The 
physician  follows  the  same  mental  processes.  A  patient  is 
in  part  an  individual  problem;  in  a  broader  sense  all  pa- 
tients fall  into  groups  and  certain  principles  apply  to  each 
group;  but  scientific  treatment  goes  beyond  these  matters 
of  human  contact  to  the  more  profound  and  fundamental 
things  of  diagnosis  and  scientific  principles  involved. 

In  a  similar  way,  the  business  man  should  analyze  his 
problems.  It  is  a  narrow,  shortsighted  policy  to  concen- 
trate on  the  mere  act  of  buying  and  selling.  This  method 
leads  to  get-rich-quick  practices.  It  is  not  a  way  to  build 
up  a  permanent,  respectable  business,  whose  foundations 
are  laid  broad  and  deep  on  a  well-considered,  broadly- 
planned,  and  thoroughly-analyzed  policy.  The  professional 
business  man  needs  to  study  the  entire  background  of  his 
business ;  he  needs  to  know  where  he  belongs  in  the  scheme 
of  things ;  how  he  is  situated  relatively  to  the  present  flow 
of  trade;  and  what  the  tendencies  of  trade  are  that  affect 
him.  To  do  this  he  must  look  beyond  the  higgling  and  bar- 
gaining process.  He  must  study  not  only  the  art  and 
science  of  buying  and  selling,  but  also  the  whole  mechan- 
ism of  trade  organization. 

5.  Functions  and  Institutions. — With  the  growing  com- 
plexity of  industry  and  commerce,  there  has  been  a  ten- 


INTRODUCTION  7 

dency  more  and  more  to  isolate  certain  economic  services, 
or  functions.  This  process  is  one  of  specialization.  For- 
merly, in  simpler  times,  a  business  man  combined  the 
capacities  of  manufacturer,  financier,  carrier,  warehouse- 
man, wholesaler,  retailer,  and  risk  taker.  A  widened  mar- 
ket, a  greater  volume  of  trade,  a  more  speculative  business 
make  such  a  simple  situation  no  longer  possible.  There 
have  developed  what  are  known  as  functionalized  middle- 
men, or  those  men,  such  as  railroadmen,  insurance  men, 
wholesalers,  retailers,  bankers,  who  devote  their  effort  to  a 
specialized  phase  of  business  activity. 

Because  these  functions  belong  to  all  business  activity,  be- 
cause they  are  an  essential  part  of  the  distributive  mechan- 
ism as  it  now  exists,  they  are  called  systems,  such  as  the 
credit  system,  the  banking  system,  the  transportation  sys- 
tem, the  warehouse  system.  This  means  that  these  services 
are  an  organized  part  of  the  distribution  of  economic 
goods. 

There  are,  then,  those  economic  activities  for  certain 
well-defined  economic  ends  that  are  called  functions.  One 
may  speak  of  the  functions  of  the  wholesaler,  of  the  re- 
tailer, of  the  credit  manager.  The  functions  of  the  whole- 
saler are  to  collect  goods  in  relatively  small  quantities  from 
a  great  variety  of  sources,  the  process  of  concentration,  to 
sort,  grade,  and  combine  them  in  lots  demanded  by  jobbers 
and  retailers,  to  distribute  to  these  jobbers  and  retailers  at 
the  time  and  in  the  quantity  desired  by  them,  and  to  finance 
the  transaction  as  far  as  necessary.  As  an  organized  func- 
tion of  the  entire  distributive  system  wholesaling  may  be 
called  an  institution. 

6.  Institutional  and  Functional  Analysis. — The  above 
distinction  is  insisted  upon  not  alone  for  the  sake  of  clear 
thinking  but  also  to  point  out  that  commercial  problems 
may  be  analyzed  from  either  one  of  these  points  of  view. 
One  may  study   the   banking  system   as  an   institution, 


8  MARKETING 

guided  by  its  own  principles,  revolving  on  its  own  axis. 
In  the  same  way,  one  may  treat  the  credit  system  as  an  in- 
stitution, or  the  railroads,  or  the  warehouses,  or  retail  stores 
or  exchanges,  and  so  on.  Or  one  may  discuss  the  com- 
mercial problems  on  a  functional  basis,  and  isolate  the 
functions  of  middlemen. 

It  will  be  found,  however,  that  functions  cannot  be  sepa- 
rated from  institutions,  and  institutions,  in  whatever  sense 
used,  cannot  be  intelligently  discussed  apart  from  func- 
tions. In  fact,  they  are  not  things  apart  from  one  another. 
Institutions  are  organized  for  the  purpose  of  facilitating 
the  performance  of  certain  functions.  The  character  of 
the  service  determines  the  type  and  character  of  the  institu- 
tion. The  service,  or  function,  is,  therefore,  more  funda- 
mental. 

7.  Commodity  Analysis. — It  is  possible  also  to  analyze 
commercial  problems  from  the  point  of  view  of  a  given 
commodity.  Thus,  one  may  trace  the  course  of  cotton,  or 
wheat,  or  corn,  or  cattle,  or  steel,  or  leather,  or  any  other 
commodity  bought  and  sold  on  the  market,  from  its  source 
to  the  consumer,  and  study  the  commercial  problems  con- 
nected with  it.  This  will  give  a  specialized  knowledge  that 
is  invaluable  so  far  as  the  specific  commodity  is  concerned. 
Such  an  analysis  will  not,  however,  demonstrate  broad 
principles.  From  such  a  basis  of  knowledge,  one  cannot 
know  for  himself  why  there  is  an  organized  exchange  for 
cotton  and  wheat  and  not  for  wool ;  he  cannot  know  whether 
staple  goods  can  be  advertised  as  well  as  style  goods.  One 
may  know  thoroughly  that  one  subject,  but  he  cannot  gen- 
eralize from  it.  A  single  commodity  is  only  an  illustra- 
tion, and  it  may  be  a  pertinent  and  vivid  one,  too,  but  it 
will  not  establish  a  principle.  On  the  other  hand,  if  one 
commodity  after  another  is  taken  up  in  succession,  there 
will  necessarily  be  duplication. 

The  conclusion  becomes  inevitable.    The  best  method  of 


INTRODUCTION  9 

analyzing  the  commercial  problems  is  by  a  combination  of 
the  three  methods  suggested.  Institutions  and  functions 
may  be  studied  through  illustrations.  That  is  the  logical, 
scientific  method.  It  is  the  method  to  be  followed  in  this 
discussion. 

8.  Types  of  Economic  Goods. — No  one  has  yet  made  a 
searching  analysis  of  the  types  of  economic  goods  as  they 
flow  through  the  market.  There  is  possible  at  this  time, 
therefore,  only  a  general  grouping,  with  broad  twilight 
zones  to  separate  them.  This  broad  classification  will  serve 
as  a  working  basis,  however,  until  a  more  nearly  scientific 
study  is  made.  In  this  discussion,  goods  "on  the  market" 
will  fall  into  one  or  the  other  of  two  general  groups;  one 
is  called  raw  materials  and  foodstuffs,  the  other  is  manu- 
factured products.  The  full  justification  for  this  division 
will  appear  as  the  discussion  develops.  A  practical  justifi- 
cation may  be  stated  here.  The  great  bulk  of  raw  materials 
and  foodstuffs  come  through  to  the  factory  or  the  con- 
sumer with  little  or  no  intervention  of  the  manufacturer — 
unless,  of  course,  the  original  producer  is  so  called.  With 
the  development  of  the  canning  and  preserving  industries, 
even  this  distinction  is  disappearing.  In  the  second  group, 
the  manufactured  products,  it  is  obviously  intended  that 
the  manufacturing  process  shall  be  predominant. 

9.  Raw  Materials  and  Foodstuffs. — As  has  been  said 
the  great  bulk  of  raw  materials  and  foodstuffs  reach  the 
fabricating  plant  or  the  consumer  without  any  intervening 
manufacturing  process.  They  thus  arrive  at  their  market 
essentially  in  their  natural  state.  Some  manufacturing, 
some  production  always  takes  place,  of  course,  since  coal 
and  ore  must  be  broken  to  convenient  size  and  timber  must 
be  cut  or  even  sawn  into  lumber,  and  fish,  fowl,  and  meat 
animals  may  be  killed  and  cleaned.  In  spite  of  these  qualifi- 
cations, the  vast  bulk  of  such  commodities  come  to  market 
practically  in  their  natural  state. 


10  MARKETING 

From  this  fact  two  or  three  important  consequences 
follow.  In  the  first  place,  these  commodities  are  formed 
by  the  forces  of  nature  and  not  by  man.  They  do  not  come 
into  being  in  accordance  with  a  predetermined  plan  that 
man  has  made.  "Wheat  and  corn  do  not  grow  to  match  the 
changes  in  fashion ;  ore  was  formed  wholly  independent  of 
style.  These  things  must  be  taken  as  they  are  produced  by 
the  laws  of  nature,  and,  if  necessary,  adapted  to  the  wants 
of  man.  Since  these  commodities  are  produced  by  forces 
beyond  the  control  of  man,  it  follows  also  that  they  do  not 
readily  fall  into  any  standard  patterns.  Standards  are 
difficult  to  apply  to  them. 

Another  point  to  be  considered  is  that  within  this  group 
fall  the  materials  essential  to  the  very  existence  of  man. 
For  these  essential  materials  the  demand  is  established.  It 
is  the  supply  that  is  to  be  regulated,  and  for  a  control  of 
which  there  is  a  never-ending  struggle.  In  fact,  one  of  the 
most  vital  things  to  watch  in  studying  the  marketing  prob- 
lems connected  with  this  group  of  commodities  is  the  con- 
trol. And  since  many  of  them  are  perishable,  there  is  a 
large  speculative  element  and  consequent  risk.  The  two 
important  things  to  watch  in  the  marketing  of  raw  mate- 
rials and  foodstuffs  are  control  and  risk.  As  these  goods 
are  on  their  way  through  the  trade  organization,  who  has 
the  control,  who  bears  the  risk  ? 

10.  Manufactured  Goods. — The  distinguishing  char- 
acteristic of  this  group  is  the  obvious  one,  namely,  that  the 
fabricating  process  is  of  paramount  importance  in  pre- 
paring materials  for  human  consumption.  It  is  at  this 
point  that  machinery  has  entered  most  conspicuously,  with 
its  attendant  problems.  For  commercial  analysis  the  par- 
ticular point  to  be  considered  in  this  connection  is  the  de- 
velopment of  the  repetitive  process,  with  its  accompanying 
standardization  and  setting  of  fixed  patterns. 

Manufacturered  goods,  in  form  and  texture,  are  con- 


INTRODUCTION  11 

trolled  by  the  will  of  man.  He  transfers  his  will,  along 
with  his  thought,  skill,  and  intelligence,  to  his  machines. 
Fabrication  is  just  this  process  of  molding,  modifying, 
shaping  the  crude  materials  in  accordance  with  the  manu- 
facturer's will.  But  the  manufacturer  is  only  in  very 
small  part  the  originator  of  the  form  and  texture  of  his 
products.  He  takes  his  orders  from  the  market ;  he  adapts 
his  production  to  the  consumer's  demand.  And  just  here 
arise  the  forces  to  make  the  marketing  problems  of  finished 
products  distinct  from  those  of  raw  materials  and  food- 
stuffs. For  out  of  this  power  of  control  grows  the  power 
to  identify,  to  brand,  to  trade-mark  goods.  Here  enters 
also  that  most  powerful  force,  advertising.  And  so,  where- 
as in  the  marketing  of  raw  materials  and  foodstuffs  em- 
phasis is  to  be  placed  upon  the  control  of  the  commodity 
and  the  risk  of  its  destruction  or  deterioration,  in  this  case 
the  emphasis  is  upon  the  control  of  consumer's  demand. 
An  entire  series  of  different  problems  arises  from  this  dis- 
tinction. 

11.  Business  Facts  and  Business  Principles. — There  is 
a  persistent  fallacy  among  business  men  that  the  problems 
of  each  individual  business  are  unique.  In  a  superficial 
sense  all  problems  are  unique,  just  as  no  two  leaves  are 
exactly  alike.  Similarly,  examples  in  arithmetic,  problems 
in  algebra,  theorems  in  geometry  are  unique.  But  there 
are  mathematical  principles  underlying  them  all,  and  there 
are  business  principles  common  to  all  business  problems, 
"if  men  would  but  with  patience  distil  them  out." 

' '  Herein  may  be  illustrated  the  dividing  line  between  the 
general  principle  and  the  unique  problem  of  each  business. 
The  law,  the  rule,  the  principle  is  general,  the  facts  are 
unique,  are  individual.  It  is,  of  course,  the  most  difficult 
problem  of  all  to  see  the  general  rule  behind  the  unique 
facts."1 

'Duncan,    Commercial   Eeseurch,   p.    347. 


12  MARKETING 

Hard-headed  business  men  who  would  not  for  a  moment 
believe  that  one  swallow  makes  a  spring,  seem  prone  to 
accept  one  instance  as  demonstrating  a  business  principle. 
Business  writing  is  full  of  arguments  from  a  single  instance 
to  a  general  law.  There  have  not  yet  been  collected  and 
analyzed  enough  business  data  from  which  to  develop 
scientific  rules ;  the  very  best  that  can  be  done  is  to  be  care- 
ful and  comprehensive.  One  great  value  of  a  general  dis- 
cussion of  this  kind  lies  in  guiding  the  reader  by  a  descrip- 
tive analysis  into  careful  methods  of  business  research. 

12.  Commercial  Problems  and  Business  Research. — The 
great  body  of  available  business  facts  is  yet  to  be  organized 
and  analyzed.  Scientific  principles  have  only  very  re- 
cently been  applied  to  them.  The  general  business  man 
has  never  had  the  training  or  the  leisure  time  to  do  research 
work.    Here  the  field  is  all  ready  for  the  harvest. 

It  is  one  primary  purpose  of  this  discussion  to  point  the 
way  to  a  careful  analysis  of  business  problems.  While 
there  will  be  given  here  a  descriptive  analysis  of  the  general 
framework  of  trade  organization  for  handling  both  manu- 
factured and  unmanufactured  goods,  the  real  benefit  to  be 
derived  from  a  study  of  the  trade  organization  is  to  carry 
some  given  commodity  along  through  that  study.  It  is, 
therefore,  energetically  urged  that  some  such  supplemen- 
tary work  be  done. 

The  analysis  of  commercial  problems  may  be  made 
analogous  to  experiments  in  physics  and  chemistry,  al- 
though the  scientific  precision  of  the  latter  is  not  possible 
in  the  former.  A  business  laboratory  is  at  hand  in  every 
trade  center ;  the  principles  of  business  are  operating  every- 
where. The  business  facts,  from  which  business  principles 
are  drawn,  are  not  to-day  in  books ;  they  are  on  the  street, 
in  the  shop.  Commercial  problems  are  not  static,  but  dy- 
namic. They  shift  and  change  from  day  to  day.  Hence  their 
great  difficulty  and  hence  also  their  perennial  interest. 


INTRODUCTION  13 

Their  complexity  and  their  difficulty  afford  a  stimulating 
intellectual  challenge. 

13.  Commercial  Problems  and  Statistics. — One  cannot 
go  far  in  a  study  of  commercial  problems  without  finding 
need  for  at  least  an  elementary  knowledge  of  statistical 
methods.  The  student  of  business  problems  will  be  in  al- 
most constant  contact  with  figures.  These  will  be  thrown 
at  him  in  all  sorts  of  odd  forms,  sometimes  distorted  to 
produce  a  certain  effect,  sometimes  unwittingly  twisted 
awry,  sometimes  bungled  by  crude  but  fallacious  methods 
of  classification.  One  should  know  how  to  hold  his  mental 
equilibrium  under  all  circumstances.  He  must  be  able  to 
bring  order  out  of  chaos,  to  identify  error,  to  present  clearly 
and  effectively  the  truth.  To  be  able  to  do  this,  he  must 
have  a  workable  knowledge  of  statistical  principles. 

14.  Commercial  Problems  and  Economic  Theory. — A 
knowledge  of  the  general  principles  of  economics  is  as- 
sumed in  this  discussion.  As  a  matter  of  fact,  it  is  necessary 
here  to  apply  those  general  principles.  There  are  courses 
in  engineering  schools  called  applied  mechanics  and  applied 
mathematics.  So  this  study  might  be  called  one  in  applied 
economics.  The  law  of  diminishing  returns,  or  of  mar- 
ginal utility,  or  of  supply  and  demand,  is  not  merely  a 
thing  in  a  book,  but  a  live,  actuating  principle  of  business 
life.  The  factors  of  production  may  be  seen  at  work  in  all 
trade  centers.  When  this  fact  is  realized,  there  is  no  longer 
any  thought  of  economics  as  a  "dismal  science";  it  be- 
comes surcharged  with  life;  it  is  fascinating,  absorbing. 

15.  Commercial  Problems  and  Business  Management. — 
There  is  frequent  mention  in  these  days  of  business  becom- 
ing a  profession,  and  the  business  man  a  professional  man. 
Before  this  condition  can  be  realized,  business  men  must 
have  professional  training.  By  professional  training  is 
meant  the  securing  of  a  practical  familiarity  with  an  or- 
ganized body  of  principles  which  are  to  be  applied  to  cer- 


14  MARKETING 

tain  types  of  problems.  This  is  true  of  training  in  the 
medical  profession,  in  the  legal  profession,  in  engineering, 
in  all  professional  schools.  If  the  practitioner  or  judge  be 
transformed  into  a  business  manager,  one  finds  an  analogous 
case.  For  the  business  manager  to  become  professional,  he 
must  master  the  body  of  principles  in  accordance  with 
which  his  problems  are  resolved. 

Business  capacity  is,  after  all,  only  the  ability  to  solve 
correctly  as  they  arise  the  business  problems  that  confront 
one  in  carrying  on  an  enterprise.  Commercial  problems 
come  before  the  business  manager  daily.  If  he  is  not  to 
solve  them  in  a  hit-or-miss  fashion,  if  he  is  to  discard  his 
rule-of-thumb  methods,  he  must  acquaint  himself  with  such 
principles  as  are  illustrated  in  this  discussion. 

16.  History  of  Commerce. — He  will  be  best  prepared  to 
take  up  a  study  of  the  current  commercial  problems  who 
has  been  well  grounded  in  the  historical  development  of 
commerce.  Most  problems  have  an  important  and  instruc- 
tive ancestry,  and  tradition  is  a  powerful,  conservative 
force  in  all  kinds  of  business.  Change  is  the  haunting  fear 
of  most  business  men. 

A  survey  of  the  industrial  and  commercial  history  of  the 
United  States,  at  least,  should  precede  a  course  on  market- 
ing. American  business  institutions  are  only  British 
business  institutions  transplanted  to  a  new  country,  fabu- 
lously rich  in  natural  resources,  and  institutions  that  have 
been  modified  and  improved  and  sometimes  transformed  by 
the  shrewdness,  skill,  and  daring  of  American  business  men. 
The  greater  the  knowledge  of  the  industrial  and  commercial 
history  of  Great  Britain,  the  better  equipped  one  is  to 
understand  our  own  problems. 

17.  Commercial  Law. — Business  is  transacted  under 
legal  restrictions.  Many  business  problems  pivot  on  legal 
issues.  A  striking  example  is  found  in  competition  itself. 
What  is  unfair  competition?    The  answer  is  for  the  courts 


INTRODUCTION  15 

to  make,  and  they  will  make  it  from  legal  precedents  and 
business  facts.  Private  property  and  contract  are  funda- 
mentally legal  questions.  Obviously,  therefore,  some  knowl- 
edge of  commercial  law  is  necessary  for  an  intelligent  dis- 
cussion of  business  problems. 

18.  Educational  Value  of  Commercial  Study.— Within 
recent  years  there  has  been  a  rapidly  growing  appeal  for 
the  study  of  present-day  business  problems.  In  general, 
education  has  been  turning  to  a  study  of  life  as  it  is,  rather 
than  to  study  life  as  it  was  or  is  thought  to  have  been.  If 
life  is  to  be  lived  intelligently  in  the  midst  of  the  vast  prob- 
lems that  surround  us,  it  behooves  one  to  focus  his  attention 
on  them.  It  is  for  this  reason  that  a  study  of  business  is 
coming  to  be  looked  upon  as  having  cultural  value.  A 
careful  scrutiny  of  business  problems  does  not  need  to 
make  one  materialistic.  The  large  part  of  human  relation- 
ships are  business  relationships.  Why,  therefore,  should 
they  not  receive  the  serious  attention  of  thoughtful  men  ? 

Suggestions  for  Study 

The  following  points  will  afford  the  basis  for  a  discussion 
preliminary  to  an  analysis  of  marketing  problems: 


1.  Origin  of  commercial  organization. 

2.  Historical  development  of  commercial  organization. 

3.  Functional  analysis  of  commercial  problems. 

4.  Modern  tendencies  in  commercial  development. 

5.  Machine  industry  and  trade  organization. 

6.  Specialization  in  trade  organization. 

7.  Business  integration  and  trade  organization. 

8.  Relation  of  government  to  trade  organization. 

Readings  : 

Commons,  Labor  Administration,  pp.  219-264. 


16  MARKETING 

Duncan,  Commercial  Research,  Chap.  XI. 
Nystrom,  Economics  of  Retailing,  Chap.  II. 
Shaw,  Some  Problems  of  Market  Distribution,  pp.  7-23. 
Smith,  Industrial  and  Commercial  Geography,  pp.  675-683. 
Weld,  American  Economic  Review,  June,  1917,  pp.  306-318; 
August,  1917,  pp.  565-575. 

II 

1.  Economic  research  versus  scientific  research. 

2.  Economic  laws  in  business. 

3.  Obstacles  in  the  way  of  accuracy  in  business  research. 

4.  Sources  of  business  facts. 

5.  Analyzing  business  facts. 

6.  Interpreting  business  facts. 

7.  Business  facts  and  business  policies. 

8.  Business  research  and  competition. 

9.  Research  and  commercial  education. 

10.     Governmental  responsibility  for  commercial  research. 

Readings  : 

Calkins,  Business  of  Advertising,  Chap.  V. 

Casson,  Ads.  and  Sales,  Chap.  III. 

Cherington,  Advertising  as  a  Business  Force,  Chap.  I. 

Copeland,  Business  Statistics,  pp.  207  et  seq. 

Duncan,  Commercial  Research,  Chaps.  Ill,  IV,  X. 

French,  Advertising,  Chap.  XII. 

Lewis,  E.  St.  Ev  Industrial  Management,  series  of  articles,  Oc- 
tober, 1916,  to  February,  1917,  pp.  10,  225,  289,  684. 

Martin,  S.  0.,  "A  Scientific  Study  of  Marketing."  Annals  of 
the  American  Academy  of  Political  and  Social  Science, 
May,  1915. 

Parlin,  Printers'  Ink,  February  10,  1917. 

Ill 

1.  The  problem  of  reducing  business  experience  to  figures. 

2.  The  value  of  the  proper  unit. 

3.  Eliminating  the  bias. 

4.  The  "personal  equation"  in  business  statistics. 


INTRODUCTION  17 

5.  Are  statistical  methods  scientific? 

6.  The  question  of  business  barometers. 

7.  The  practical  use  of  the  "mode." 

8.  The  construction  and  significance  of  index  numbers. 

9.  The  problem  of  proper  weighting. 
10.  "Inertia  of  large  numbers." 

Readings  : 

Babson,    Business    Barometers    for    Forecasting    Conditions, 

Chaps.  I,  IV. 
Brookmire,  American  Economic  Review,  vol.  iii,  pp.  43-58. 
Copeland,  Business  Statistics,  pp.  3-97. 
Duncan,  Commercial  Research,  Chap.  IX. 
Persons,   American   Economic   Review,   December,   1916,    pp. 

736-769. 
The  Annalist,  September  10,  1917,  p.  331. 

It  is  suggested  that  each  student  should  select  at  once 
some  commodity  to  be  studied.  The  best  method  is  to  fol- 
low the  line  of  personal  interest,  and  a  study  should  be 
planned  to  carry  through  both  the  raw-material  and  the 
finished-product  stage.  An  analysis  of  the  commercial 
problems  should  be  persistently  followed  until  some  con- 
siderable mastery  of  them  is  obtained.  It  has  been  fre- 
quently verified  by  experience  that  interest  increases  with 
increased  knowledge.  No  commodity  is  so  prosaic  or  so 
commonplace  as  not  to  yield  an  abundant  harvest  of  inter- 
esting facts  and  experiences. 

The  selection  of  a  commodity  is  an  important  step  and 
should  be  taken  only  after  consideration.  The  particular 
points  to  be  considered  are,  (a)  personal  interest,  (Z>) 
material,  (c)  possibility  of  seeing  actual  marketing  process, 
(d)  connection  with  future  plans. 

Immediately  upon  selecting  the  commodity  the  student 
should  set  about  working  up  a  bibliography.  The  points 
indicated  above  for  study  and  discussion  may  well  occupy 


18  MARKETING 

the  class-room  discussion  while  the  student  is  preparing 
the  bibliography. 

If  the  course  is  to  bring  the  best  results  in  training,  it  is 
absolutely  necessary  to  insist  from  the  start  upon  thought- 
ful, careful,  and  neat  work.  The  bibliography,  for  instance, 
should  be  made  on  cards,  with  accurate  references,  and  ar- 
ranged topically  to  cover  the  following  chapters  in  the 
discussion  of  raw  materials  and  foodstuffs.  In  preparing 
the  reports  on  each  problem,  careful  references  should  be 
made  to  all  authorities.  Habits  of  good,  businesslike 
workmanship  may  thus  be  established. 


PART  I 


RAW  MATERIALS  AND  FOODSTUFFS 


CHAPTER  II 

ANALYSIS  OP  THE  COMMODITY 

19.  Purpose. — In  the  study  of  practical  business  affairs 
the  economic  world  is  found  to  be  a  going  concern.  Eco- 
nomic goods  are  flowing  onward  day  and  night  from  their 
source  to  the  consumer.  It  is  a  complex,  intricate,  closely 
related  mechanism  that  is  to  be  studied,  and  no  single 
phase  can  be  wholly  isolated  from  its  setting  and  analyzed 
as  a  thing  apart.  Commodities  are  drawn  to  market  by  the 
force  of  human  wants,  and  on  their  way  the  original  ma- 
terials are  modified  in  response  to  the  requirements  of  that 
demand. 

There  is,  then,  an  interaction  between  a  commodity  and 
the  demand  for  it ;  they  are  complements.  And  these  two, 
the  commodity  and  the  demand  for  it,  react  upon  each 
other  through  a  series  of  intermediaries  known  as  middle- 
men. Strictly  speaking,  therefore,  a  commodity  may  be 
studied  completely  in  its  commercial  relationship  only  in 
connection  with  the  distributive  system  and  the  consumer 
demand.  For  the  purpose  of  a  careful  and  comprehensive 
analysis,  however,  the  problem  may  be  broken  up  into 
constituent  problems.  It  is  proposed  here  to  sketch  the 
analysis  of  a  commodity,  as  an  article  of  merchandise,  as 
marketable  goods.  This  analysis  can  be  applied  to  any 
kind  of  a  commodity,  whether  a  material  thing  or  a  service. 

20.  Method. — The  study  will  be  carried  forward  under 
two  general  headings:  (1)  the  characteristics  of  the  com- 
modity and  (2)  the  supply  of  the  commodity.  Under  the 
first  topic  the  commodity  is  considered  more  or  less  philo- 

21 


22  MARKETING 

sophically,  by  abstracting  it  and  thinking  about  it  in  its 
various  commercial  aspects.  It  is  an  analysis  from  a  qualita- 
tive point  of  view.  Under  the  second  topic  the  commodity 
is  studied  quantitatively.  The  queries  that  arise  are: 
Where  found  ?  How  produced  ?  How  much  ?  How  prepared  ? 
and  so  forth. 

21.  Characteristics  of  the  Commodity. — A  commodity, 
to  be  marketable,  must  be  adapted  to  satisfy  some  human 
want.  If  nature  does  not  prepare  it  so  that  it  may  be  di- 
rectly used,  some  sort  of  preliminary  process  is  necessary. 
This  is  a  commercial  consideration.  So,  wheat  must  be 
threshed;  meat  must  be  dressed  and  packed;  fruit  must 
be  picked ;  coal  must  be  mined ;  tea  must  be  cured.  In 
general,  some  sort  of  productive  process  is  needed.  But 
apart  from  these  productive  considerations  there  are  many 
qualities,  of  commercial  significance,  to  be  examined.  Just 
as  the  Interstate  Commerce  Commission  has  endeavored  to 
examine  all  classes  of  commodities  that  enter  into  traffic 
on  the  basis  of  their  characteristics  that  affect  transporta- 
tion, so  commodities  for  the  market  must  be  analyzed  for 
all  of  their  characteristics  that  affect  their  marketing. 

22.  New  or  Established  Commodity. — One  of  the  first 
queries  that  arise  is  whether  or  not  the  commodity  is  a 
new  one  on  the  market  or  a  long-established  one.  There 
may  be  a  well-worn  path  to  market,  with  traditional  meth- 
ods of  preparing  and  handling,  or  there  may  be  the  problem 
of  educating  the  consumer  in  new  tastes.  Oranges  and 
lemons  are  found  to-day  even  in  the  remotest  hamlet ;  they 
may  be  said  to  be  thoroughly  established.  And  yet  there 
are  men  and  women  still  living  who  remember  the  days 
when  they  were  not.  The  grape  fruit  is  a  later  develop- 
ment, is  less  widely  and  thoroughly  established.  Casaba 
melons  are  still  newer.  Peanuts  are  comparatively  recent 
on  the  market.    Word  was  returned  from  Europe  that  some 


ANALYSIS  OF  THE  COMMODITY  23 

peoples  there  nearing  starvation  still  looked  upon  canned 
corn  as  fit  only  for  animal  food. 

Many  of  the  minerals  have  been  known  for  a  very  long 
time,  although  new  uses  have  from  time  to  time  been  de- 
veloped. Iron  is  to-day  considered  the  "barometer  of 
trade."  Copper,  lead,  zinc,  silver,  gold,  mineral  oils  are 
established.  Of  recent  date,  however,  are  monazite  sand 
used  for  incandescent  gas-light  mantles,  manganese  for 
high-speed  steel,  cryolite  for  preparing  aluminum,  asbestos 
that  is  entering  into  so  many  familiar,  every-day  things, 
and  even  phosphate  rock  and  nitrates  for  fertilizer.  The 
list  of  commodities  could  be  almost  indefinitely  lengthened 
by  the  enumeration  of  by-products,  such  as  bone  dust,  cot- 
ton seed,  slag,  etc.,  of  new  products  to  satisfy  established 
wants,  and  of  long-known  commodities  to  meet  new  wants. 

In  raw  materials  and  foodstuffs  of  all  kinds,  it  is  neces- 
sary to  inquire  into  their  status.  If  these  materials  go  into 
an  established  commodity,  or  if  as  foodstuff  they  are  di- 
rectly applied  to  satisfy  an  elemental  want,  the  commercial 
problems  are  different  from  those  connected  with  an  inno- 
vation. In  the  former  case  attention  is  focused  on  methods 
of  preparation,  or  production,  and  distribution ;  in  the  lat- 
ter case  the  problem  pivots  on  the  development  of  the  want. 

23.  Necessity  or  Luxury. — A  second  practical  inquiry 
is  whether  or  not  the  commodity  may  be  classed  as  a  neces- 
sity or  as  a  luxury.  A  thin  line  divides  between  these  two 
categories,  but  the  distinction  is  a  practical  one.  Iron  may 
be  called  an  industrial  necessity ;  so  likewise  with  coal  and 
copper.  Sugar  and  milk  are  a  dietary  necessity  to-day,  if 
the  standard  of  living  is  maintained.  That  commodity  may 
be  called  a  necessary  of  life  which  is  essential  to  the  general 
maintenance  of  the  existing  standard  of  living.  If  this 
commodity  for  any  reason  fails,  then  a  satisfactory  substi- 
tute must  be  had  or  the  standard  of  living  falls.  Thus, 
phosphates  and  nitrates  are  necessary  to  maintain  the 


24  MARKETING 

productive  quality  of  the  soil.  If  these  cannot  be  had  from 
phosphate  rock  or  nitrate  of  soda,  then  other  sources  must 
be  tapped  or  production  falls.  The  same  principle  holds 
for  human  beings.  Certain  elements  are  required  for  food, 
for  clothing,  for  shelter,  in  order  to  maintain  the  existing 
economic  well  being.  These  are  necessaries.  All  things 
beyond,  however  commendable  and  to  be  desired,  are  luxu- 
ries. 

Goods  pass  from  the  one  group  into  the  other;  luxuries 
develop  into  necessities.  This  is  economic  progress.  Salt 
has  from  time  immemorial  been  a  necessity,  while  grape, 
fruit,  alligator  pears,  and  the  whole  list  of  exotic  fancy 
groceries  are  not.  In  raw  materials  and  foodstuffs,  there- 
fore, there  are  necessities  and  luxuries. 

As  will  appear  more  concretely  later  on,  this  is  a  prac- 
tical distinction.  It  is  obvious,  however,  that  the  control 
of  one  kind  of  material  would  differ  in  effect  from  the  con- 
trol of  another.  It  is  clear,  also,  that  necessities  are  pulled 
by  an  irresistible  demand  into  the  market,  while  luxuries 
must  be  pushed  upon  the  market.  In  one  case,  too,  the 
question  of  price  is  more  important  than  in  the  other.  The 
customer  of  the  fancy  grocery  makes  price  a  secondary  or 
incidental  consideration.  The  dependableness  of  the  de- 
mand, the  freedom  from  whimsicality,  freakishness,  and 
caprice  are  characteristic  of  the  demand  for  the  necessities. 

24.  Staple  or  Novelty. — Very  closely  connected  with 
the  preceding  consideration  is  the  classification  of  the  com- 
modity as  a  staple  or  a  novelty.  In  general,  all  necessities 
are  staples;  all  luxuries  are  novelties.  The  distinction 
turns,  however,  not  so  much  on  whether  or  not  the  com- 
modity is  long  established  among  human  wants  as  on 
whether  or  not  there  is  an  element  of  style  connected  with 
it.  As  far  as  raw  materials  are  concerned,  the  effect  is  in- 
direct, being  reflected  back  from  the  finished  product. 
Among  foodstuffs  the  ''fancy"  types  are  novelties.    Apples 


ANALYSIS  OF  THE  COMMODITY  25 

may  be  bought  by  the  barrel — common  apples,  good,  ripe, 
juicy.  But  apples  may  also  be  bought  wrapped  up  in 
tissue  paper,  particularly  large,  fine  specimens,  or  a  "hot- 
house" variety.  Strawberries  in  wintertime  may  be  novel- 
ties; whereas  in  the  early  summer  at  the  height  of  the 
season  they  are  staples.  Milk  of  good  quality  may  be  de- 
livered at  the  back  door  every  morning  in  the  year.  But 
one  may  also  buy,  at  probably  twice  the  price,  a  "certified" 
quality.  The  former  is  a  staple ;  the  latter  a  novelty.  Sugar 
may  be  only  "plain"  sugar,  or  it  may  be  "loaf,"  "tea," 
"powdered,"  or  other  "fancy"  kinds. 

A  staple  is  a  commodity  in  general  use,  a  common  item 
in  industry  or  human  dietary.  It  is  purchased  for  its 
native  inherent  qualities.  A  novelty  is  a  commodity  of 
special  qualities.  The  purchaser  pays  for  more  than  the 
native  qualities — either  special  care  in  selection,  in  han- 
dling, in  packing,  or  some  other  attempt  to  give  distinction 
to  it.  But  the  distinction  is  almost  wholly  relative. 
What  is  considered  a  staple  by  one  individual  or  group 
may  be  considered  a  novelty  by  another  individual  or  group. 
It  is  a  matter  of  personal  taste,  of  purchasing  power,  of 
standard  of  living.  There  is  the  fancy  grocery  group  just 
as  there  is  a  silk  stocking  group. 

25.  Perishable,  Semi-perishable,  Non-perishable. — It  is 
necessary  commercially  to  note  the  perishability  of  a  com- 
modity. The  dominating  factor  in  marketing  milk  or  ripe 
fruits  is  their  perishability.  A  whole  series  of  special 
problems  arise  from  this  fact.  Many  commodities  have 
been  considered  non-perishable  when  in  reality  this  was 
not  the  case.  Farmers  have  stacked  their  hay  in  the  fields 
and  left  it  to  withstand  the  elements  as  best  it  might.  Cot- 
ton growers  have  been  careless  in  exposing  cotton  to  the 
weather.  In  the  West  and  in  Argentina  wheat  is  left 
in  the  field  after  threshing.  These  and  countless  other 
careless  methods  have  caused  a  great  social  waste. 


26  MARKETING 

Not  only  are  there  the  gross  errors  of  leaving  corn  to 
rot  in  the  fields,  letting  coal  slake  in  the  rain  and  snow, 
permitting  weevils  to  invade  the  grain  bins,  but  there  is 
also  the  nice  problem  of  bringing  the  perishable  product 
to  market  in  proper  condition.  The  banana,  a  perishable 
product,  must  be  carried  thousands  of  miles  to  market. 
Strawberries,  grown  in  the  South,  are  to  be  served  on  the 
tables  of  New  England.  Oysters  are  delivered  fresh  over 
a  wide  area.  Special  means  to  make  these  things  possible 
have  been  devised.  But  first  a  study  had  to  be  made  of 
when  to  pick,  how  to  pack,  what  the  temperature  necessary 
to  bring  them  to  market  in  proper  condition. 

26.  Dependability  of  Supply  of  Commodity. — There  may 
or  may  not  be  a  steady  flow  of  the  commodity.  The  amount 
may  be  practically  controllable,  as  is  true  of  all  natural 
resources  which  are  still  abundantly  available.  Coal  and 
ore  and  stone  and  salt,  and  timber  perhaps,  can  be  adjusted 
to  market  demand  as  it  manifests  itself.  It  is  merely  a 
question  of  preparing  an  output  program.  The  situation 
becomes  much  more  complex  where  the  supply  is  uncertain 
and  its  location  is  not  certainly  known.  It  is  estimated 
that  all  of  the  gold  and  silver  produced  in  modern  times 
would  not  pay  common  wages  to  those  who  have  prospected 
and  dug  for  them.  It  is  said,  too,  that  the  output  of 
petroleum  has  never  paid  back  what  has  been  spent  in 
drilling  for  it. 

Crops  are  always  exposed  to  the  whims  of  the  weather. 
Their  output  cannot  be  accurately  predicted  even  up  to  the 
time  of  harvest.  To  forecast  the  quality  is  still  more  diffi- 
cult. In  the  last  weeks  of  its  maturity  rust  may  attack 
the  wheat,  or  the  rye,  or  the  oats.  A  drought  may  shrivel 
the  corn  in  full  tassel.  A  week  of  rain  may  rot  the  pota- 
toes.   A  storm  may  beat  off  the  fruit. 

Many  products,  too,  are  seasonal.  It  requires  a  year 
to  grow  a  new  cotton  crop.    Three  or  four  years  are  neces- 


ANALYSIS  OF  THE  COMMODITY  27 

sary  to  bring  beef  cattle  to  marketing  maturity.  Two  years 
at  least  are  needed  for  sheep.  Hogs  mature  more  quickly, 
but  no  appreciable  change  can  be  made  in  the  supply  in 
less  than  six  months.  Oranges  or  lemons  may  require  five 
or  six  years;  coffee  seven  or  more;  rubber  a  much  longer 
period. 

Important  commercial  problems  arise  from  these  facts. 
The  supply  for  the  coming  period  of  six,  twelve,  or  more 
months,  or  for  years  can  be  pretty  definitely  charted  when 
the  returns  are  all  in  at  the  close  of  the  season.  The  cotton 
crop  is  fairly  well  defined  by  November  1 ;  the  wheat  crop 
is  known  a  little  earlier;  corn  about  the  same  time.  The 
"visible  supply"  then  approaches  the  total  supply. 

Much  depends,  also,  upon  market  conditions  at  planting, 
sowing,  and  breeding  time.  At  this  time  the  producers 
estimate  what  it  will  be  profitable  for  them  to  do,  whether 
to  increase  or  decrease  acreage,  to  sell  the  stock  or  retain 
the  cattle,  sheep,  and  hogs  for  breeding  purposes.  When 
these  decisions  are  made  the  lines  begin  to  form  that  will 
determine  the  coming  season's  supply. 

There  are  many  modifications  here,  however.  The  acre- 
age of  winter  wheat  may  be  determined  in  the  autumn, 
but  if  there  are  clear  indications  before  spring  that  this 
acreage  is  too  small,  or  if  the  wheat  is  "winter  killed," 
some  recuperation  may  be  had  by  an  increased  spring 
wheat  sowing.  Where  the  season  proves  bad  for  certain 
major  crops,  too,  there  may  be  possible  some  kind  of 
"catch-up"  crops  to  compensate  in  part.  Another  modifi- 
cation to  be  considered  is  the  fact  that  the  great  staples 
have  now  a  world-wide  range.  Wheat  of  Argentina 
ripens  at  an  interval  of  six  months  from  the  winter  wheat 
of  the  United  States.  Australian  wheat  relieves  a  famine  in 
India.  Thus,  while  within  a  certain  political  division  there 
may  be  extreme  fluctuations,  throughout  the  world  these 
can  be  somewhat  leveled  out. 


28  MARKETING 

A  commodity,  therefore,  may  be  seasonal,  intermittent, 
or  steady  in  supply.  Where  there  is  uncertainty  of  any 
sort  as  to  supply,  whether  because  of  uncontrollable  natural 
forces  or  too  great  control  through  private  ownership,  there 
will  be  created  a  speculative  element  in  the  market.  The 
great  staple  food  crops  are  the  most  speculative  commodities 
that,  enter  the  market. 

27.  Control  of  Supply. — Under  our  system  of  private 
property  rights  and  national  control  it  becomes  necessary 
to  inquire,  not  only  into  the  amount  possibly  available,  but 
also  into  the  control  of  materials.  The  past  few  years  have 
taught  the  nations  of  the  world  the  "strategy  of  minerals."1 
This  lesson  came  home  to  the  United  States  only  less  keenly 
than  to  the  European  countries.  In  the  competition  of  the 
future  the  query  will  be  more  than  where  the  essential 
materials  may  be  found;  it  will  include  also  the  control 
thereof.  The  United  States  desires  to  build  ocean  cables 
and  finds  gutta  percha  essential  to  that  industry.  Satis- 
factory supply  can  be  had  only  from  British  territory  in 
the  Straits  Settlements.  Cryolite  is  necessary  for  the  effi- 
cient production  of  aluminum,  and  its  sole  source  is  in 
Greenland  mines  under  control  of  the  Danish  Government. 
Manganese  is  essential  for  high-speed  steel  and  the  Bra- 
zilian or  other  foreign  supplies  must  be  tapped.  Quebracho 
wood  is  sought  from  South  America  for  tanning ;  nitrate  of 
soda  from  Chile  for  a  fertilizer;  asbestos  from  Canada 
or  South  Africa. 

For  a  single  commodity  or  for  a  whole  industry  certain 
materials  may  be  pivotal.  In  such  a  case  conditions  may 
arise  where  the  control  of  pivotal  material  enables  an  in- 
dividual, a  corporation,  or  a  state  to  drive  a  hard  bargain. 
"It  is  not  difficult,  however,  to  imagine  conditions  even 
in  times  of  peace,  in  which  it  might  become  desirable  to 
use  the  possession  of  these  assets  as  an  instrument  of  com- 

*See  George  Otis  Smith,  The  Strategy  of  Minerals. 


ANALYSIS  OF  THE  COMMODITY  29 

mercial  negotiation. ' ' x  It  is  wise  to  know,  as  far  as  possi- 
ble, that  the  road  to  materials  is  assuredly  an  open  high- 
way. 

28.  Substitutes. — The  business  mind  revolts  at  control. 
Note  the  feverish  search  for  substitutes  to  take  the  place  of 
nitrates  from  Chile,  for  building  material  to  take  the 
place  of  the  dwindling  supply  of  timber,  for  the  cultivation 
of  fruits  and  nuts  to  make  up  for  the  diminishing  harvest 
from  native  trees.  Rubber  may  be  now  made  synthetically. 
A  manufactured  combination  may  displace  sole  leather  in 
boots  and  shoes. 

It  is  part  of  business  acumen  to  investigate  the  possibili- 
ties of  substitutes  for  any  given  commodity.  Here  is  the 
field  for  ingenuity.  The  world  rests  secure,  even  though 
it  may  prove  to  be  in  a  fool's  paradise,  in  the  belief  that 
something  will  be  developed  to  take  the  place  of  natural 
resources  as  they  are  exhausted.  It  is  a  lazy  attitude,  and 
leaves  a  part  of  the  commercial  problem  unsolved. 

29.  Units  of  the  Commodity. — Goods  are  bought  and 
sold  on  the  basis  of  some  kind  of  unit.  Cotton  has  the  bale, 
round  or  square,  for  its  unit;  coal  in  quantities  has  the 
ton,  or  in  less  amounts  the  bushel,  pound,  basket,  or  bri- 
quette; apples  may  be  handled  by  the  barrel,  crate,  pound, 
or  individually;  eggs  by  weight,  count,  dozen,  or  crate; 
hides  and  skins  ' '  per  piece ' ' ;  hay  by  the  ton ;  wheat  by  the 
bushel  or  the  quarter ;  oranges  by  the  crate  or  dozen ;  tea 
by  the  pound  or  chest ;  gold  or  silver  by  the  ounce  or  bar ; 
milk  by  the  bottle,  quart,  or  pint ;  gas  by  the  thousand  cubic 
feet.  Every  commodity  develops  its  unit  of  calculation, 
which  becomes  familiar  to  the  trade. 

Some  analytical  inquiry  should  be  made  into  the  unit  of 
calculation.  Because  one  exists  and  is  familiar  in  the  trade, 
is  not  proof  that  it  is  most  convenient  or  most  economical. 
It  is  true,  however,  that  once  established  a  unit  is  hard  to 

Report  of  British  Dominions  Royal  Commission,  p.  163. 


30  MARKETING 

eradicate.  British  experience  is  apropos  here.  There  are 
units  used  in  England  that  seem  awkward  elsewhere,  but 
the  British  stubborn  pertinacity  retains  them.  A  ' '  quarter ' ' 
of  wheat  is  an  example.  Even  a  hundred-weight  in  Eng- 
land contradicts  itself,  being  in  reality  one  hundred  and 
twelve  pounds.  The  guinea  is  odd,  too,  for  it  is  not  a  coin, 
never  was  a  coin,  and  equals  the  curiously  awkward  num- 
ber of  twenty-one  shillings. 

The  point  to  be  emphasized  is  that  here  is  another  phase 
of  the  analysis  of  a  commodity  to  be  studied.  Familiarity 
should,  of  course,  be  had  with  the  common  units.  These 
units  should  furthermore  be  examined  critically  to  see  if 
improvements  may  not  be  made.  Tradition  should  not  be 
permitted  to  keep  an  inconvenient  and  uneconomical  unit 
fastened  upon  business.  The  simple  count  method  in  deal- 
ing with  eggs  is  fast  disappearing.  A  bushel  of  apples  is 
now  being  inquired  into  as  to  quality,  size,  flavor.  This 
is  one  way  for  business  to  progress. 

30.  Requiring  or  Not  Requiring  Preparation. — A  further 
consideration  in  the  analysis  of  a  commodity  is  the  prepara- 
tion required  to  fit  it  for  the  market.  This  may  be  a  sim- 
ple or  a  complex  process,  expensive  or  inexpensive,  tech- 
nical or  not.  Whatever  it  is  should  be  known.  The  curing 
of  furs,  as  well  as  hides  and  skins,  is  most  important.  The 
pasteurizing  of  milk  is  equally  so.  The  process  of  curing 
tea  is  very  difficult  and  requires  great  skill.  Such  a  com- 
modity as  crushed  stone  requires  a  distinct  process  of 
preparation  for  the  market,  so  that  whereas  the  original 
stone  seems  readily  available  from  the  fields  where  it  lies, 
it  is  nevertheless,  because  of  the  necessary  preparation, 
brought  under  the  control  of  a  business  organization.  There 
are  three  distinct  activities  in  the  process  of  preparing 
crushed  stone  for  the  market,  the  quarrying,  the  crushing, 
and  the  screening.  Considerable  capital  is  required  in 
opening  up  a  new  quarry.    This  tends  to  concentrate  the 


ANALYSIS  OF  THE  COMMODITY  31 

business  in  the  hands  of  a  few  concerns.    Here  the  com- 
mercial consequences  are  revealed. 

Each  commodity  will  have  certain  peculiar  problems 
connected  with  its  preparation  for  the  market.  A  brief 
survey  may  perhaps  show  that  salt  by  whatever  process 
obtained  is  equally  savorous,  that  the  mining  of  an  ore  is 
of  no  material  concern.  It  is  necessary,  nevertheless,  to 
discover  these  facts.  It  is  a  part  of  the  commercial  prob- 
lem. 

31.  Independent  or  Group  Product. — A  commodity  may 
go  independently  to  satisfy  human  wants.  The  demand  is 
therefore  directly  for  it.  This  is  true  in  general  of  food- 
stuffs. Coal  may  pass  directly  to  the  grate,  stove,  or  fur- 
nace to  be  burnt  for  giving  warmth  to  human  beings,  or  it 
may  go  into  coke  for  use  in  making  steel.  Here  the  demand 
is  for  the  machine  and  affects  coal  only  indirectly.  Cryo- 
lite, which  is  used  in  purification  of  aluminum,  is  likewise 
affected  indirectly.  Manganese,  that  is  to  be  used  for  har- 
dening steel,  has  a  demand  which  is  dependent  on  the  de- 
mand for  steel. 

It  is  needful  to  keep  in  mind  this  point.  The  question 
should  be  asked:  Does  this  commodity  have  an  indepen- 
dent demand  or  an  indirect  or  group  demand?  In  the 
former  case  the  lines  run  directly  from  the  wants  to  the 
commodity ;  in  the  latter  case  this  demand  may  be  one,  two, 
or  more  steps  removed.  In  this  latter  case,  too,  the  fate  of 
the  commodity  is  involved  in  the  fate  of  all  the  others. 
Each  in  its  turn  may  become  pivotal. 

32.  Varieties,  Species,  etc. — A  complete  analysis  must 
necessarily  include  a  study  of  the  varieties,  types,  and 
species  of  a  commodity.  The  names  given  to  these  will 
usually  be  taken  from  the  geographical  locality,  from  the 
shape  or  appearance,  or  from  certain  other  qualities.  There 
are  many  varieties  of  tea  but  the  best  known  are  those 
based  upon  producing  districts.  There  are  the  India,  Chi- 


32  MARKETING 

nese,  Japanese,  Ceylon,  Java,  and  Formosa  teas.  Of  salt 
there  are  two  general  kinds,  common  salt  and  table  salt, 
differing  only  in  fineness  of  grain  and  carefulness  of 
handling.  Sugar  is  divided  into  two  general  kinds,  cane 
and  beet,  and  each  is  subdivided  into  raw  and  refined.  Re- 
fined sugar  is  graded  as  follows:  granulated,  powdered,  con- 
fectioners', cube,  and  soft.  Pig  iron  goes  by  the  following 
names:  Bessemer,  low-phosphorus,  basic,  foundry,  forge 
or  mill,  malleable,  white,  mottled  or  mixed,  direct  castings, 
spiegeleisen,  ferro-manganese,  ferro-silicon. 

The  varieties  of  a  commodity  may  or  may  not  be  directly 
related  to  grades;  they  may  or  may  not  be  directly  related 
to  uses.  Bituminous  coal  has  these  "commercial  grades": 
caking  or  coking  coal,  non-coking,  cannel,  cherry,  splint, 
free  burning,  binding,  block,  gas,  steam,  etc.,  or  steam-boat, 
broken,  heater,  egg,  stove,  range,  chestnut,  pea,  buckwheat, 
rice.  It  can  be  seen  that  there  is  here  a  mixture  of  uses 
and  shapes.  The  common  varieties  of  peanuts  are  the 
Virginia  Runner,  Virginia  Bunch,  African  or  North  Caro- 
lina type,  Spanish  type,  the  Valencia,  or  Tennessee  Red 
type,  the  Georgia  Red,  and  Red  Spanish  type.  Distinction 
is  made  between  Sea  Island  cotton  and  upland  cotton. 
Egyptian  cotton  is  also  a  distinct  type. 

On  one  basis  or  another  certain  types  of  a  commodity 
become  known  by  a  name.  This  name  may  designate  certain 
qualities  or  certain  forms,  or  it  may  indicate  only  the  pro- 
ducing region  or  some  producer.  It  may  be  significant  or 
insignificant  commercially.  But  sooner  or  later  the  name 
will  have  some  relation  to  quality  and  price.  Expert  grain 
inspectors  can,  by  a  mere  glance,  identify  the  producing 
region  and  each  producing  region  is  identified  with  certain 
characteristics  of  the  grain. 

33.  Physical  and  Chemical  Tests. — To  be  scientific  the 
analysis  of  a  commodity  should  extend  to  physical  and 
chemical  tests.     One  of  the  first  tests  of  corn  is  to  deter- 


ANALYSIS  OF  THE  COMMODITY  33 

mine  the  amount  of  moisture  it  contains.  Simple  mechani- 
cal devices  are  used  to  sort  out  certain  sizes  of  apples, 
oranges,  or  potatoes.  Eggs  are  now  consistently  candled 
before  marketing.  Ores  are  tested  chemically  for  their 
relative  constituent  parts.  Oranges  are  sometimes  put  to 
chemical  tests  also  to  determine  the  amount  of  acid.  In- 
dustrial chemistry  for  analytical  purposes  has  become  a 
profession.  "The  miller  of  to-day  has,  in  his  own  mill, 
or  at  his  easy  command  the  laboratory  equipment  and  the 
services  of  a  skilled  chemist  who  furnishes  him  accurate 
advance  information  on  the  new  wheat  he  is  about  to  han- 
dle. He  knows  what  are  its  moisture  per  cent,  gluten 
color,  and  gluten  elasticity.  He  knows  for  his  baker  cus- 
tomers' direction  what  are  its  required  absorption,  time  of 
fermentation,  time  of  proofing,  time  of  baking,  etc." 

An  extension  of  such  analysis  means  more  intelligent 
business;  it  means  putting  business  on  a  more  scientific 
basis.  The  resulting  knowledge  should  become  available 
not  only  for  the  manufacturer  whose  demand  for  materials 
is  exacting,  but  also  for  the  dealer  and  for  the  general 
merchant.  To  discover  such  knowledge  and  to  use  it  is 
part  of  the  commercial  problem. 

Such  analysis  as  has  been  suggested  in  the  foregoing 
pages  may  be  almost  indefinitely  extended.  Along  with  the 
scientist,  the  business  man  must  grow  in  knowledge  of  the 
physical  world,  and  this  increasing  knowledge  must  be 
transmitted  into  business  wisdom,  that  is,  applied  to  busi- 
ness problems.  The  ultimate  goal  of  all  analysis  of  com- 
modities is  to  adapt  them  most  economically  to  human 
wants.  Because  business  is  carried  on  for  a  profit  is  no 
reason  why  it  should  be  carried  on  crudely  or  ignorantly. 
The  process  of  investigation  may  well  begin  with  an  an- 
alysis of  the  commodity. 

34.  Supply  of  Commodity. — A  second  general  phase  of 
the  analysis  of  a  commodity  is  largely  statistical  in  char- 


34  MARKETING 

acter.  It  has  to  do  with  amounts  and  with  values.  But 
there  are  other  things  to  be  considered  also.  One  needs 
to  know  something  of  the  means  of  production,  something 
of  the  geographical  location  of  the  producing  regions  and 
their  delimiting  characteristics.  At  this  point  commercial 
geography  can  be  of  much  service.  It  is  to  be  kept  in  mind 
throughout  this  section  as  well  as  the  preceding  one,  that 
every  item  finds  expression  someway  or  other  in  the 
trade  organization.  In  fact,  one  cannot  justly  or  wisely 
judge  the  organization  of  trade  without  such  information. 

35.  Means  of  Production. — A  broad  survey  of  the  mar- 
keting problem  will  involve  the  study  of  the  means  of  pro- 
duction. It  may  become  a  critical  consideration  that  ma- 
chinery may  be  applied  to  all  important  operations.  The 
development,  for  instance,  of  a  cotton-picking  machine 
might  prove  revolutionary.  There  is  one  operation  in  han- 
dling wheat  which  still  for  the  most  part  must  be  done  by 
human  hands.  This  is  shocking  the  wheat  in  the  field.  In 
some  wheat  producing  regions  this  step  has  been  wholly 
eliminated.  It  is  important  to  know  that  sugar  beets  and 
peanuts  represent  the  "family  type"  of  cultivation.  This 
fact  has  affected,  and  may  at  any  time  again  affect,  the  sup- 
ply, through  social  forces  wholly  apart  from  these  com- 
modities. 

The  future  competition  in  growing  cotton  will  be  greatly 
determined  by  the  existence  of  an  adequate,  adaptive  labor 
supply.  Cattle  hides  and  horse  hides  are  by-products  of 
cattle  and  horse  raising.  What  affects  the  business  of 
breeding  cattle  and  horses  will  affect  the  supply  of  hides. 
Are  the  conditions  changing  to  the  detriment  of  cattle  and 
horse  raising?  Sheep  may  be  grown  either  for  wool  or 
mutton.  Conditions  affecting  the  producing  of  sheep  may 
affect  the  supply  of  either  or  both. 

Only  by  a  careful  investigation  and  by  keeping  in  close 
touch  with  all  changes  in  methods  of  producing  a  com- 


ANALYSIS  OF  THE  COMMODITY  35 

modity  can  the  real  significance  of  this  point  be  revealed. 
The  method  in  vogue  may  be  destructive  of  important 
qualities  in  the  commodity  or  it  may  be  unnecessarily  ex- 
pensive.   The  point  of  view  of  the  dealer  and  the  informa- 
tion which  his  experience  may  bring  to  the  subject,  will  be 
of  much  help  in  correcting  these  uneconomical  or  waste- 
ful practices.    Dealers  in  eggs  have  already  done  much  to 
improve  the  conditions  under  which  they  are  produced. 
Commission  merchants  have  helped  to  tone  up  the  fruit- 
growing business.    Cold-storage  men,  having  learned  from 
experience  that  it  is  all  important  for  commodities  to  go 
into  storage  in  first  class  condition,  are  trying  to  educate 
the  producers  into  better  methods  of  production.     Milk 
dealers  have  been  concerned  in  teaching  milk  producers  the 
elementary  principles  of  bacteriology,  in  order  that  pro- 
duction methods  may  be  improved  and  a  better  product 
may  be  put  on  the  market.    In  many  cases  it  has  been  found 
necessary  to  build  pasteurizing  plants  in  the  country  to 
gain  control  of  the  milk  at  the  earliest  possible  stage. 

The  merchant  should  always  be  interested  in  the  meth- 
ods of  producing  the  goods  he  handles;  the  manufacturer 
is  necessarily  so.  A  jobber  in  canned  goods  formerly 
bought  his  products  from  the  farmer  growers  when,  where, 
and  as  he  could.  In  order  to  gain  credit  for  the  care 
which  he  used  in  selecting,  preserving,  and  canning  fruits, 
he  placed  his  name  and  trade-mark  on  the  cans.  One  sea- 
son he  bought  an  unusually  fine  quality  of  peaches,  which 
he  canned  and  gave  a  special  name.  It  sold  well.  But 
the  following  season  he  could  find  nothing  to  match  them  in 
quality  or  flavor.  Complaints  were  made  by  the  consumer 
that  the  name  on  the  can  was  deceptive  for  it  did  not  in- 
dicate the  same  quality  of  goods  as  before.  In  order  to 
control  the  quality  of  fruit  going  into  his  cans,  this  jobber 
bought  orchards  and  took  care  that  there  was  proper  spray- 
ing, proper  picking,  and  proper  handling  of  the  fruit. 


36  MARKETING 

36.  Geographical   Location    of   Producing-   Regions. — 

There  is  not  only  the  question  of  how  the  commodity  is  pro- 
duced but  also  the  question  of  where  it  is  produced.  This 
inquiry  is  directly  concerned  with  the  fluctuation  in  supply. 
There  is,  too,  the  most  economical  region  of  production  as 
well  as  the  most  economical  method.  It  is  possible  to-day 
to  make  a  world  survey  of  productive  possibilities. 

The  location  of  natural  resources  has  been  irrevocably 
established  by  the  laws  of  nature.  Commercial  and  indus- 
trial organization  must  adjust  itself  to  this  situation.  In  a 
true  sense  this  is  a  "natural  monopoly."  But  the  produc- 
ing regions  for  commodities  are  often  likewise  limited  by 
other  requirements.  The  productive  region  for  sugar  beets 
is  very  narrowly  limited  to  certain  physical  and  climatic 
conditions.  So  far  only  a  small  area  is  fitted  for  their 
production.  These  sections  appear  in  Michigan,  Minnesota, 
Nebraska,  Colorado,  and  some  small  parts  of  other  western 
states.  The  producing  region  for  tea  is  limited  by  the  need 
for  a  copious  water  supply.  It  is  necessary  to  have  from 
100  to  250  inches  of  rainfall  per  year.  Rice  has  similar 
requirements.  The  producing  regions  for  coffee,  for  rubber, 
for  bananas  are  limited  for  similar  reasons.  The  United 
States  has  its  "corn  belt"  and  its  orange  region.  Just  as 
minerals  may  be  determined  in  location  by  natural  laws, 
so  the  growth  of  vegetables  is  determined  by  soil  or  cli- 
matic conditions. 

Even  within  the  area  available  for  production,  there  may 
be  a  contest  between  crops.  "Wheat  is  known  as  a  pioneer 
crop  and  is  driven  onward  by  the  advance  of  settlements 
and  crops  more  lucrative  under  intensive  cultivation.  Pea- 
nuts demand  a  special  kind  of  soil  and  climate  and  labor 
supply.  It  is  said:  ""Wherever  cotton  thrives  the  peanut 
finds  a  home."  Between  these  two  crops  there  is  competi- 
tion. The  struggle  for  diversified  farming  in  the  South 
is  another  type  of  crop  competition. 


ANALYSIS  OF  THE  COMMODITY  37 

Gradually  crops  adjust  themselves  to  the  most  economi- 
cal location.  There  are  good  reasons  for  certain  counties 
in  "Wisconsin  being  the  greatest  milk-producing  sections  in 
the  world.  The  abnormal  price  adjustments  during  the 
recent  war,  however,  tended  to  upset  this  industry.  A  new 
demand  or  an  abnormal  demand  may  at  any  time  disturb 
crop  locations  and  affect  supply.  Some  movement,  some 
agitation  is  almost  constantly  causing  readjustments  of  a 
more  or  less  material  character. 

37.  Historical  Survey  of  Producing  Regions. — An 
historical  investigation  should  be  made  to  ascertain 
whether  forces  are  at  work  to  increase  or  to  decrease  the 
productive  area.  In  cotton  new  species  are  being  experi- 
mented with.  A  region  in  the  Southwest  may  prove  to  be 
profitable  for  Egyptian  cotton.  "Within  recent  years  the 
cotton-producing  region  has  spread  to  new  states.  The 
cattle  and  sheep  ranges  in  the  "West  have  been  decreasing 
in  area.  The  orange-growing  area  fluctuates,  especially  in 
the  South,  reaching  farther  and  farther  north  during  the 
years  when  no  frost  molests.  Then  will  come  a  killing 
freeze,  and  the  region  suddenly  contracts.  Due  to  the  guar- 
anteed price  for  wheat,  the  acreage  sown  increased  within 
one  year  by  from  10  per  cent  to  20  per  cent  in  certain  mid- 
Western  states.  It  is  all  important  for  one  whose  interests 
are  affected  by  crop  production  to  follow  the  shifting  proc- 
ess with  the  movement  of  population.  Production  has  its 
great  movements  of  ebb  and  flow  as  well  as  its  fluctuating 
waves. 

Here,  too,  comes  a  study  of  the  elasticity  of  supply  and 
its  reaction  to  changes  in  demand.  The  cattle  buyers  in  the 
Chicago  stock  market  know  how  long  it  requires  a  change 
in  price  to  affect  the  oncoming  supply.  A  series  of  pros- 
perous years  for  growers  of  oranges  and  lemons  caused  the 
planting  of  new  orchards  to  such  an  extent  that  within  a 
space  of  five  years  the  orange  output  was  expected  to  double 


38  MARKETING 

and  the  lemon  production  to  increase  50  per  cent.  A  season 
of  glutted  market  may  cause  a  half  or  more  of  the  straw- 
berry beds  to  be  plowed  up  or  let  run  wild.  Two  or  three 
poor  seasons  for  peaches  have  caused  the  cutting  down  of 
many  orchards.  The  price  of  silver  has  reopened  many 
an  abandoned  mine.  All  such  facts  are  of  commercial  sig- 
nificance. 

38.  Characteristics  of  Producing  Regions. — It  is  im- 
portant to  consider  not  only  the  location  and  limitation  of 
the  productive  region,  but  also  the  commercial  bearing  of 
these  facts.  Wheat  has  a  far-flung  productive  region,  ex- 
tending throughout  different  climates,  the  crops  coming  to 
maturity  and  being  harvested  at  different  seasons ;  the  har- 
vest season  is  long  and  the  wheat  flows  into  market  for 
several  months;  there  is  less  chance  for  a  complete  failure 
of  crop ;  more  varieties  are  possible ;  it  is  a  real  or  poten- 
tial competitor  with  other  crops;  it  is  adapted  to  large  or 
small  farms.  These,  among  other  facts  of  commercial  sig- 
nificance, result.  In  contrast,  cotton  and  oranges  and  sugar 
beets  are  grown  in  concentrated  areas.  One  influence  may 
materially  affect  the  entire  output ;  the  whole  crop  is  sub- 
ject to  the  same  climatic  conditions;  varieties  are  limited; 
the  bulk  comes  to  market  at  once;  an  increase  of  supply 
means  more  intensive  farming;  with  a  narrow  growing 
region  and  a  broad  demand  there  tends  to  be  a  one-crop 
system. 

Wool  shows  a  broad  producing  region  with  certain  con- 
centrated areas.  Sheep  raising  may  be  an  incident  to  farm- 
ing or  it  may  be  the  dominating  industry,  as  on  the  ranges. 
As  has  been  said,  sheep  may  be  produced  for  their  wool 
or  for  mutton.  The  supply  of  lumber  is  being  more  and 
more  narrowly  defined,  through  lack  of  a  far-sighted  for- 
esting policy.  Many  industries  are  thus  compelled  to  keep 
moving  with  the  receding  timber  line.  There  are  now  clearly 
defined  forest  regions  in  the  United   States:  the  North- 


ANALYSIS  OF  THE  COMMODITY 


39 


western,  Central,  Southern,  Rocky  Mountain,  and  Pacific 
regions.  The  content  of  these  regions  has  been  estimated 
as  follows: 


Forest  Region 


Area 

Stumpage 

(Million 

(Billion 

acres) 

feet) 

90 

270 

150 

630 

130 

300 

1,000 

300 

80 

1,300 

Northern    

Southern    

Central   

Rocky  Mountain 
Pacific     


This  careful  charting  of  supply  makes  possible  a  tight 
control  over  output.  The  saying  that  one  should  not  keep 
all  of  one's  eggs  in  a  single  basket  is  particularly  appro- 
priate when  applied  to  a  tropical  enterprise.  Only  by 
means  of  a  very  widely  scattered  area  of  production,  and 
a  diversified  list  of  products,  is  the  industry  of  the  tropics 
enabled  to  withstand  the  sweeping  disasters  that  nature 
there  is  prone  to  hurl  upon  it.  This  broadly  distributed 
source  of  supply  seems  as  a  system  of  self -insurance  against 
the  forces  of  destruction  that  man  cannot  control.  A  vio- 
lent hurricane  can,  in  a  very  few  minutes,  utterly  destroy 
the  banana  crop  of  an  entire  island  or  district.  But  experi- 
ence has  shown  that  if  one's  producing  regions  be  scattered 
widely  enough  a  bumper  crop  in  one  region  will  at  least 
partially  compensate  for  the  loss  which  hurricane,  flood, 
or  drought  has  inflicted  in  another. 

The  producing  area  of  each  commodity  has  its  own  pecu- 
liar problems.  These  can  be  discovered  and  analyzed  only 
by  a  careful  survey.  In  general,  the  commercial  significance 
of  each  characteristic  should  be  examined.    The  tendency 


40  MARKETING 

of  each  area  to  increase  or  to  decrease  in  amount,  to  im- 
prove in  quality,  to  change  in  variety  should  be  carefully 
observed. 

39.  Volume  of  Production. — An  analysis  of  a  commodity 
will  include  a  statistical  investigation  of  the  volume  of  out- 
put through  a  sufficient  number  of  years  to  demonstrate 
all  tendencies.  Variations  in  volume  must  be  accounted  for, 
in  order  to  isolate  the  influences  at  work  and  to  evaluate 
them.  The  period  examined  should  cover  a  sufficient  length 
of  time  to  give  the  necessary  background  for  judging  the 
existing  conditions. 

40.  Value  of  Output. — A  further  study  should  be  made 
of  the  value  or  market  price  of  the  commodity.  This  exam- 
ination will  be  carried  on  especially  in  its  relation  to  the 
volume  of  output.  A  comparison  of  these  two  items  will 
throw  much  light  upon  market  conditions  and  the  influ- 
ences at  work  there. 

41.  "Visible  Supply." — Wherever  possible  a  study 
should  be  made  of  the  surplus  or  "visible  supply,"  of  the 
commodity.  This  amount  may  be  what  is  on  record  at 
any  particular  moment,  in  storage,  on  board  freight  cars, 
or  on  board  ships.  It  is  the  amount  available  for  trade. 
Of  special  significance,  however,  is  the  "visible  supply" 
at  the  close  of  the  season.  In  fact,  one  of  the  most  impor- 
tant parts  of  the  analysis  is  a  comparison  and  an  interpre- 
tation of  the  relation  between  the  volume  of  output,  the 
value,  and  the  "visible  supply." 

42.  Conclusion. — This  survey  has  indicated  the  most  im- 
portant points  to  be  kept  in  mind  when  analyzing  a  com- 
modity. It  has  been  shown  that  a  careful,  philosophical, 
and,  if  possible,  scientific  examination  of  the  qualities  of 
each  product  is  of  great  commercial  significance.  A  chart- 
ing of  quantity  and  value  is  likewise  necessary.  It  must 
be  remembered  that  all  of  these  things  are  of  importance  in 
their  bearing  upon  the  market  and  the  trade  organization. 


ANALYSIS  OF  THE  COMMODITY  41 

Suggestions  for  Study 
The  discussion  in  this  chapter  should  be  applied  to  the 
commodity  selected  by  each  student  for  research.    The  fol- 
lowing points  are  suggestive  of  work  to  be  done: 

1.  Let  the  student  supply  himself  with  a  base  map  of  the 
United  States,  then  go  to  one  of  the  following  sources  and 
locate  on  the  map  the  productive  region  for:  (a)  cotton; 
(6)  wheat;  (c)  livestock;  (d)  petroleum;  and  other  com- 
modities. 

References : 

Statistical  Abstract. 
United  States  Atlas. 
Department  of  Commerce,  Bureau  of  Census,  Bulletins 

128  (1914),  131  (1915),  etc. 
Thirteenth  Census,  Volumes  v,  vi,  vii. 
Yearbook  of  the  Department  of  Agriculture. 
Reports  of  U.  S.  Geological  Survey. 
Various  handbooks. 

2.  From  the  same  sources  secure  the  necessary  data  to  show: 

(a)     Volume  of  production  in  the  United  States  for 

ten,  fifteen,  or  twenty  years. 
(6)     Value  of  annual  crop  for  same  period, 
(c)     Surplus  or  "visible  supply"  for  same  period. 
Chart  these  figures  on  the  same  sheet  for  compari- 
son. 

3.  Enumerate  the  factors  that  have  made  for  (a)  increased 
production,  or  (b)   decreased  production. 

4.  Interpret  your  charts  from  the  point  of  view  of  these 
factors,  accounting  in  this  way  as  fully  as  possible  for 
all  significant  fluctuations. 

5.  In  the  light  of  these  facts,  what  is  the  prophecy  for  the 
future? 

6.  Interpret  the  characteristics  of  the  producing  areas  into 
commercial  terms. 

7.  Write  up  the  first  part  of  your  report  on  the  commodity 
selected  for  special  study.  Cover  all  of  the  points 
brought  out  in  this  chapter. 


CHAPTER  III 


ANALYSIS  OF   THE    MARKET 


43.  The  Market. — The  market  in  its  broadest  sense 
means  demand,  or  in  economic  phraseology,  effective 
demand — a  demand  with  the  compelling  force  of  purchas- 
ing power  behind  it.  It  is  in  some  such  sense  as  this  that 
the  term  is  used  here.  From  the  producer's  point  of  view 
the  market  is  a  chance  to  sell.  The  coal-mine  operators  sell 
coal  to  dealers;  the  lumberman  sells  his  product  to  the 
wholesale  dealer,  the  retail  dealer,  the  manufacturer  of 
furniture,  of  wagons,  of  a  thousand  other  things  of  which 
lumber  is  a  part. 

But  market  may  also  refer  to  the  region,  the  commercial 
area  within  which  the  buyers  dwell.  Manufacturing  estab- 
lishments are  concentrated  in  the  cities ;  hence,  the  markets 
for  the  raw  materials  which  they  use  are  in  the  cities.  The 
surplus  foodstuffs  from  the  farms  move  toward  the  centers 
of  population;  the  larger  the  centers  the  greater  the  mar- 
kets. In  most  cases,  however,  certain  centers  are  highly 
specialized  markets,  are  concentration  points.  Some  ex- 
planation must  be  sought  for  the  fact  that,  while  the  crude 
ore  of  aluminum  is  mined  in  Arkansas,  the  smelting  center 
is  St.  Louis,  and  the  purifying  centers  are  in  New  York 
State,  and  the  factories  for  making  aluminum  ware  are 
elsewhere.  For  a  clear  understanding  of  the  marketing 
of  copper,  reasons  must  be  found  for  the  fact  that  the  bulk 
of  the  supply  comes  from  mines  in  western  United  States, 
but  the  world  price  has  in  recent  years  been  determined 

42 


ANALYSIS  OF  THE  MARKET  43 

in  Bremen,  Germany.  Why  should  Elgin  have  become  the 
great  market  for  butter? 

Commercial  demand  is  oblivious  of  both  national  and 
state  boundaries.  If  such  a  demand  were  charted,  political 
lines  would  be  crossed  and  recrossed.  One  investigator 
has  claimed  that  a  careful  survey  would  discover  a  sauer- 
kraut territory,  a  right-hand  plow  territory,  a  wide- 
wheeled  wagon  region,  and  so  on.  These  commercial  areas 
would  run  riotously  across  state  lines,  county  lines,  and 
physical  boundaries.  And  yet  there  must  be  somewhere 
some  clear  and  reasonable  explanation  for  such  things. 

Every  analysis,  of  course,  runs  back  at  last  to  the  ele- 
mental fact  that  demand  emanates  from  man,  and  that  man 
is  a  bundle  of  habits,  whims,  fancies,  prejudices,  likes, 
tastes,  wilfulness,  and  vagaries.  Upon  such  an  unstable 
foundation  every  market  rests.  Amid  all  fluctuations,  how- 
ever, there  is  some  constancy;  some  rules,  some  principles 
are  there.  There  are  elemental  needs  which  must  be  met. 
There  are  staples  to  be  marketed. 

A  final  point  should  be  kept  in  mind.  Demand  is  a  de- 
mand for  something  of  a  particular  kind,  at  a  particular 
time,  and  in  a  certain  quantity.  Any  shift  in  this  demand 
will  be  reflected  in  the  commodity  to  satisfy  it.  It  is,  there- 
fore, impossible  to  study  the  characteristics  of  a  commodity 
wholly  apart  from  the  demand.  There  is  a  continued  inter- 
action between  commodity  and  market.  One  cannot  logi- 
cally be  analyzed  independently  of  the  other.  The  "uses" 
of  a  commodity  means  only  the  demand  for  it.  With  this 
false  step  in  logic  clearly  in  mind  we  turn  to  a  detailed 
study  of  the  market  centers. 

44.  Geographical  Location  of  Market  Centers. — There 
are  in  general  three  kinds  of  market  centers,  namely,  the 
local  market,  the  primary  market,  and  the  terminal  market. 
The  local  market  is  the  one  with  which  the  producer  is  in 
immediate  touch ;  it  surrounds  the  productive  area ;  it  re- 


44  MARKETING 

quires  only  the  haulage  which  the  producer  himself  can 
furnish.  The  type  is  not  wholly  distinct  but  is  charac- 
terized by  direct  contact  between  producer  and  retail  dealer 
or  consumer.  The  trade  organization  of  this  market  is  of 
the  simplest  type. 

The  primary  market  is  a  concentration  point,  where 
commodities  are  assembled  in  small  lots,  for  carload  or 
boatload  shipment.  Here  are  the  elevators,  the  cold  stor- 
ages, the  warehouses.  These  are  the  centers  of  reserve  stock, 
where  the  commodities  are  gathered  at  harvest  time  and 
from  which  the  supply  is  distributed  through  the  year. 

The  terminal  market  is  still  more  dimly  denned,  but  may 
be  called  the  market  center  at  seaboard  or  at  the  national 
border.  From  it  the  commodities  pass  out  of  the  country. 
At  that  point  domestic  trade  ceases  and  foreign  trade  be- 
gins. 

It  is  important  to  loeate  geographically  each  type  of  mar- 
ket center  for  a  given  commodity.  It  is  a  part  of  the  an- 
alysis of  demand  to  define  and  to  account  for  market  cen- 
ters. The  local  demand  has  its  peculiar  phases;  so  have 
the  concentration  points  and  the  terminal  markets.  De- 
mand makes  itself  felt  through  the  trade  organization  of 
each  type  of  market  center.  Some  centers,  either  because 
of  an  early  start,  because  of  superior  advantages,  or  be- 
cause of  fortuitous  circumstances,  have  specialized  in  cer- 
tain commodities.  This  holds  true  even  though  ultimate 
consumption  takes  place  elsewhere. 

Wool,  although  grown  over  a  wide  area,  and  therefore 
having  a  great  many  local  markets,  illustrates  a  concen- 
tration of  primary  markets.  In  the  East  these  are  Boston, 
New  York,  and  Philadelphia.  In  the  West  are  Portland 
and  San  Francisco.  It  is  to  these  centers  that  the  manu- 
facturers' buyers  naturally  go.  Here  are  the  great  wool 
warehouses  wherein  a  supply  is  stored  to  satisfy  the  needs 
of  the  trade  all  the  year  round.    In  the  Middle  West  are 


ANALYSIS  OF  THE  MARKET  45 

the  " transfer  points,"  Chicago,  Omaha,  and  Saint  Louis. 
A  warehouseman  in  Chicago,  some  years  ago,  undertook 
to  develop  that  city  into  a  wool  market.  He  sent  buyers 
out  West  and  established  contact  with  the  growers.  Within 
two  or  three  years  he  had  lost  some  $50,000  and  then  gave 
up.  It  was  not  possible  for  him  to  divert  the  trade:  he 
had  nothing  to  offer. 

The  general  stream  of  commerce  seeks  the  outlet  of  least  re- 
sistance. Historical  forces  have  much  to  do,  however,  in  chang- 
ing the  course  of  the  commercial  movement.  After  much  effort 
the  political  obstacles  which  stood  in  the  way  of  the  free  naviga- 
tion of  the  Mississippi  River  were  removed  and  that  highway 
became  the  natural  outlet  for  the  surplus  farm  products  of  the 
vast  interior  plains.  But  the  war  between  the  States  closed  that 
outlet  and  the  main  movement  thenceforth  sought  egress  by  way 
of  the  lakes  and  the  Eastern  trunk  lines  to  the  sea.  .  .  .  The 
diversion  of  grain  traffic  from  Buffalo  to  Montreal  is  an  illus- 
tration of  this  same  principle  that  economic  foresight  rather  than 
the  advantages  of  nature  determines  the  course  of  traffic.1 

Cotton  illustrates  the  concentrated  productive  area,  with 
a  strong  tendency  toward  a  one-crop  system.  As  ultimate 
consumers  there  are  the  Southern  mills,  the  Northern  mills, 
and  the  foreign  mills.  Where  are  the  trade  centers  ?  Most 
small  villages  afford  a  local  market.  From  these  about 
half  the  cotton  goes  to  compress  points  and  the  rest  to 
interior  concentration  points.  There  are  thirty-five  or  more 
of  these  interior  market  centers,  the  largest  of  which  are 
Houston,  Memphis,  Saint  Louis,  Augusta,  Atlanta,  Cincin- 
nati, Little  Rock,  Montgomery,  Columbia,  Shreveport,  and 
Dallas.  In  the  season  of  1911-1912,  47  per  cent  of  the  en- 
tire cotton  crop  went  through  twenty-eight  of  these  mar- 
ket centers. 

The  functions  of  such  market  centers  are  as  follows: 
1  Report  of  the  Industrial  Commission,  1900,  vol.  vi,  p.  126. 


46  MARKETING 

(1)  they  are  the  collection  points,  where  the  large  ex- 
porters of  cotton  can  hold  their  purchases;  (2)  they  fur- 
nish the  mechanism  for  central  cotton  markets;  (3)  they 
provide  the  necessary  facilities  for  storing,  weighing,  com- 
pressing, sampling,  grading,  inspecting;  (4)  they  have 
established  a  news  bureau  for  prices.2 

But  there  are  two  other  kinds  of  cotton  markets.  More 
than  half  the  cotton  grown  in  the  United  States  and  con- 
sumed within  the  country,  goes  to  mills  located  in  the  pro- 
ductive area.  The  rest  goes  to  Northern  mills.  Sixty  per 
cent  of  the  total  crop  is  exported.  To  reach  the  Northern 
mills  and  the  foreign  markets,  cotton  passes  through  cer- 
tain inland  centers  called  "northern  gateways,"  or  through 
cotton-receiving  ports.  The  chief  Northern  gateways  are 
Saint  Louis,  Memphis,  and  Cincinnati.  The  principal  cot- 
ton ports  are  Galveston,  New  Orleans,  Mobile,  Savannah, 
Norfolk  and  Newport  News,  and  San  Francisco.3 

The  functions  of  cotton  ports  are:  (1)  they  serve  as 
shipping  centers,  with  docks,  wharves,  transshipment  facili- 
ties; (2)  they  afford  points  of  concentration;  (3)  they  offer 
open  markets.    These  are  the  true  types  of  terminal  markets. 

The  market  for  milk  is  the  city  or  town;  the  larger  the 
city,  the  more  important  the  market  and  the  more  complex 
the  problem.  In  the  United  States,  the  most  difficult  prob- 
lems are  connected  with  New  York,  Boston,  Philadelphia, 
and  Chicago.  For  eggs  there  are  local  markets  everywhere. 
Chicago  is  the  largest  primary  market,  or  concentration 
point.  Eggs  that  are  shipped  into  that  city  are  reshipped 
both  east  and  west,  and  are  also  held  in  storage.  New 
York  is  the  real  terminal  market.  For  such  a  commodity 
as  crushed  stone,  there  is,  practically  speaking,  only  a  local 
market.     It  is  very  definitely  limited  by  transportation 

3  See  Huebner,  Agricultural  Commerce,  p.  117. 
3  These  centers  should  be  carefully  located  on  a  map  and  their 
locations  explained. 


ANALYSIS  OF  THE  MARKET  47 

cost.  It  rarely  pays  to  carry  crushed  stone  more  than  200 
or  300  miles.  Pig  iron  has  almost  altogether  a  local  market. 
This  type  of  market  may  be  illustrated  by  the  situation  in 
Colorado  and  in  Pittsburgh.  Birmingham,  Alabama,  may 
be  called  a  primary  market.  Chicago  is  the  chief  market 
center  for  anthracite  coal  west  of  Buffalo.  The  sole  market 
for  sugar  beets  is  the  sugar-beet  factoiy,  and  it  is  necessary 
for  this  factory  to  be  located  near  the  beet  fields,  because 
raw  beets  are  perishable,  and  heavy  and  bulky  in  com- 
parison with  their  value. 

The  market  for  leather  is  determined  by  the  shoe  and 
glove  industries.  For  these  industries  there  are  two  regions 
of  concentration,  one  in  the  far  East,  the  other  in  the  Mid- 
dle West.  New  England  produces  a  large  percentage  of 
shoes,  and  gloves  are  made  at  Johnstown  and  Gloversville. 
In  the  Middle  West  the  demand  for  leather  is  largely  con- 
centrated in  Chicago,  Milwaukee,  and  Saint  Louis.  The 
shoe  industry  absorbs  86.3  per  cent  of  all  the  leather; 
the  glove  industry  consumes  10  per  cent.  The  chief  mar- 
ket centers  for  cane  sugar  are  New  York,  Boston,  Balti- 
more, New  Orleans,  and  San  Francisco.  The  primary 
markets  for  peanuts  are  Suffolk,  Norfolk,  Petersburg, 
Franklin,  Wilmington,  Fort  Worth,  and  Houston.  The 
largest  receiving  port  for  tea  is  Tacoma,  then  in  order  New 
York,  Chicago,  and  San  Francisco.  The  chief  market  cen- 
ters for  lead  are  St.  Louis,  New  York,  and  London.  St. 
Louis  is  the  trade  center  for  aluminum.  The  meat-packing 
centers  are  well  known. 

When  raw  materials  and  foodstuffs  move  to  market  they 
reach  first  a  local  market,  then  the  primary  markets,  or 
concentration  points.  Some  part  may  be  finally  consumed 
in  each  of  these.  The  rest  will  pass  on  to  the  terminal 
markets.  The  ultimate  consumer  of  these  things  may  be 
either  a  factory  or  an  individual,  but  generally  from  the 
producer's  standpoint,  interest  in  the  product  flags  when 


48  MARKETING 

it  passes  beyond  his  control  into  the  hands  of  a  dealer. 
There  is  here  a  pretty  clearly  marked  distinction  between 
raw  materials  and  finished  products.  The  manufacturer 
is  becoming  more  and  more  interested  in  the  consumer 
demand. 

45.  Boundaries  and  Overlapping  of  Market  Areas. — 
Each  market  center  has  its  logical  boundary  determined  by 
its  marketing  advantages.  It  may  also  dominate  a  wider  area 
through  tradition  or  reputation.  The  two  chief  influences 
to  set  the  boundary  stakes  to  a  market  are  transportation 
and  marketing  facilities.  Cotton  may  flow  to  Galveston  or 
to  New  Orleans,  wherever  the  best  marketing  facilities  are. 
A  great  municipal  warehouse,  with  ample  docks  and  a  belt- 
railway  system,  has  been  recently  constructed  at  the  latter 
place.  A  very  slight  change  may  send  wheat  from  Kansas 
to  New  Orleans,  rather  than  to  Chicago,  on  its  way  to  sea- 
board. 

An  industry  tends  rapidly  to  stabilize  itself  in  relation 
to  markets.  Channels  of  trade  are  quickly  worn.  The 
marvelously  sensitive  system  known  as  arbitrage  is  a  pow- 
erful stabilizing  factor,  speedily  restoring  the  equilibrium. 
Taking  the  country  as  a  whole  for  a  commercial  unit,  there 
will  be  found  a  great  number  of  price  centers  for  each  com- 
modity. The  Department  of  Agriculture  has  estimated 
these  price  areas  for  wheat.  Controlling  each  price  area 
is  a  market  center.  But  the  boundaries  are  not  clearly 
defined;  a  relatively  broad  twilight  zone  exists.  It  hap- 
pens, too,  that  these  boundaries  tend  to  overlap.  This  is 
characteristic  of  the  cotton-market  centers.  Boston,  New 
York,  Philadelphia,  and  Baltimore  are  overlapping  market 
centers  for  many  commodities.  Chicago  and  St.  Louis, 
and  Chicago  and  Minneapolis  overlap  for  many  commodi- 
ties. 

Commodities  may  slip  past  their  "natural"  markets  to 
more  distant  ones.  Cattle  from  the  far  West  may  be  shipped 


ANALYSIS  OF  THE  MARKET  49 

to  Chicago ;  they  are  sometimes  shipped  1,000  miles.  Some 
livestock  still  drifts  eastward  to  packing  centers  in  New 
Jersey,  even  though  it  is  more  economical  to  ship  dressed 
meat.  Refrigerator  cars  filled  with  fruit  may  be  diverted 
em  route  to  points  quite  different  from  the  original.  This 
splendid  flexibility  makes  for  a  more  efficient  market.  There 
are  no  political  barriers  to  stop  trade  within  the  United 
States ;  it  is  a  single  free-trade  area.  Physiographical  bar- 
riers have  been  largely  broken  down  by  an  effective  trans- 
portation system.  Supply  and  demand  work  more  freely 
over  broad  stretches  of  the  country ;  market  areas  are  thus 
extended ;  there  is  further  overlapping  and  need  for  read- 
justment. 

46.  Market  Competition. — There  are  two  kinds  of  mar- 
ket competition,  real  and  potential.  A  market  center  is 
held  in  line  by  the  fact  that  its  neighbor  stands  ready  to 
invade  its  " natural"  territory.  Also,  through  the  over- 
lapping referred  to  above  there  is  real  competition.  This 
kind  of  competition  may  run  on  the  basis  of  price,  quality, 
or  service.  As  one  approaches  the  margin  of  a  ' '  natural ' ' 
tributary  territory  to  a  market  center,  the  competition  in 
price  becomes  keener  between  the  centers. 

Within  the  market  center  there  is  usually  intensive  com- 
petition. Take  the  livestock  markets,  for  instance.  Within 
them  may  be  found  the  large  packers  of  the  Middle  West, 
the  smaller  packers,  the  wholesale  slaughterers,  the  East- 
ern packers  and  slaughterers,  the  exporters,  the  stockers, 
and  the  feeders.  Within  a  given  market  area  there  is  com- 
petition for  the  supply  of  milk,  as  "raw"  milk,  for  con- 
densed milk,  evaporated  milk,  and  milk  powder.  Makers 
of  cheese  and  ice  cream  also  contend  with  milk  dealers. 
Within  the  market,  as  well  as  between  markets,  there  is 
competition. 

Among  local  merchants  the  competition  for  eggs,  which 
are  usually  bought  by  count,  is  wholly  on  the  basis  of  price. 


50  MARKETING 

All  eggs  are  assumed  to  be  equally  desirable,  regardless  of 
quality  or  size.  In  crushed  stone,  the  competition  is  wholly 
on  the  basis  of  price.  Salt  is  usually  competed  for  on  a 
price  basis,  although  it  has  been  possible  to  give  distinction 
to  it  by  boxing  it  and  making  it  pourable.  Staples  gener- 
ally are  bought  and  sold  on  a  price  basis. 

47.  Consumer  Demand  in  Relation  to  Market  Centers. — 
Emphasis  has  here  been  placed  upon  the  market  center 
as  the  market  for  raw  materials  and  foodstuffs.  When 
these  commodities  have  reached  the  market  center  they 
have  traveled  only  part  of  their  way  to  the  consumer. 
The  demand  of  the  market  center  is  always  guided  and 
controlled  by  the  consumer  demand.  It  is  the  shifting  in 
the  demand  that  causes  readjustments  among  mar- 
ket centers.  Cincinnati  was  once  the  great  central  live- 
stock market.  The  market  was  later  transferred  to  Chi- 
cago, and  now  bids  fair  to  pass  on  westward.  Chicago 
was  formerly  the  greatest  wheat  market.  Now  Minne- 
apolis has  forged  ahead.  South  Bend  was  once  a  much 
greater  lumber  market  than  it  is  to-day.  As  the  peoples 
shift,  the  markets  shift. 

This  consumer  demand  affects  not  only  the  quantity  but 
also  the  quality  of  the  product.  Milk  is  coming  more  and 
more  to  be  sold  on  the  basis  of  quality.  As  purchasing 
power  increases,  consumers  demand  a  higher  quality  of 
product.  Through  the  mechanism  of  market  centers  the 
change  in  consumer  demand  is  carried  to  producers. 

48.  Character  of  Market  Demand. — The  demand  for  raw 
materials  and  foodstuffs  has  many  important  characteristics. 
Once  more  each  commodity  will  develop  its  own  peculiar 
problems  to  be  solved.    These  will  require  special  study. 

One  of  the  first  inquiries  to  make  is,  what  is  the  size 
of  the  market  area?  It  may  be  merely  local  as  is  true  of 
cement,  crushed  stone,  sugar  beets,  sand,  and  gravel.  This 
does  not  mean  that  there  is  no  demand  elsewhere.    It  in- 


ANALYSIS  OF  THE  MARKET  51 

dicates  that  some  factor  definitely  and  finally  limits  the 
area.  In  the  instances  cited,  it  is  the  cost  of  transporta- 
tion. There  used  to  be  only  a  local  market  for  perishable 
products.  Transportation  facilities  have  made  possible 
a  much  wider  market  for  them.  Or,  take  the  case  of  milk. 
Its  perishability,  in  general,  limits  eaeh  market  area,  but 
special  circumstances  have  arisen,  such  as  a  boycott  by 
producers,  under  which  milk  has  been  carried  from  the 
vicinity  of  St.  Louis,  and  some  has  been  brought  a  1,000 
miles  from  the  New  York  territory  to  Chicago. 

There  are  other  markets  too  broad  to  be  called  local,  but 
yet  which  do  not  pass  beyond  the  limits  of  the  state.  Some 
businesses  are  incorporated  to  operate  within  the  state. 
The  artificial — from  the  point  of  view  of  economic  forces — 
boundaries  of  a  political  state,  however,  do  not  furnish  any 
logical  delimitations  for  a  market. 

The  market  area  may  broaden  out  to  cover  the  entire 
country.  Again,  there  are  political  barriers  only  to  be 
overcome.  Tariffs,  agreements,  duties  may  affect  the  area. 
But  the  saying,  in  general,  is  true,  that  trade  knows  no 
national  limitations.  Treaties  and  tariffs  may  hamper 
competition  and  for  a  time  set  narrow  bounds  to  the  mar- 
ket, but  all  such  obstacles  have  been  overcome  in  the  past. 
There  are,  of  course,  certain  national  tastes,  habits,  tra- 
ditions, which  affect  the  frontiers  of  a  market,  just  as  within 
a  country  there  are  religious  beliefs  that  affect  demand. 

Many  commodities,  and  the  number  increases,  enjoy  an 
international  market.  Among  these  are  gold,  silver,  copper, 
wheat,  cotton.  While  the  demand  for  these  as  raw  ma- 
terials is  concentrated  in  the  manufacturing  establishments, 
these  in  turn  are  affected  by  the  universality  of  demand  for 
the  products.  There  will  tend  to  develop  a  world-market 
center. 

On  the  whole,  political  boundaries  do  not  coincide  with 
market  areas.    Economically  speaking,  political  boundaries 


52  MARKETING 

are  accidental  and  artificial.  Nevertheless,  they  may  have 
important  influences  and  should  be  studied  in  connection 
with  each  commodity. 

Politically,  and  in  the  administration  of  matters  of  purely 
local  concern,  the  forty-eight  States  may  retain  their  entity. 
But  economically  the  country  will  consist  of  six  great  regions, 
each  an  empire  in  wealth  and  territory,  each  homogeneous  in  point 
of  business  and  industry  and  all  bound  together  by  a  network  of 
a  quarter  million  miles  of  shining  steel.  The  scalpel  of  com- 
munity interests  would  divide  our  national  body  into  the  Eastern 
Region,  the  Southern  Region,  the  Lake  Region,  the  Central 
Region,  the  Southwestern  Region,  and  the  Western  Region. 

For  all  practical  purposes  each  region  embraces  a  territory  in 
which  the  industrial  character  of  traffic,  places  of  outlet,  and 
general  conditions  are  homogeneous.  The  Eastern  Region  com- 
prises the  great  industrial  section  of  the  country — the  textile 
mills,  the  shoe  and  leather  manufactories,  the  iron  and  steel  busi- 
ness, and  the  coal  and  oil  fields.  The  boundaries  of  the  Southern 
Region  encompass  the  cotton-growing,  spinning  and  weaving 
industries,  the  iron  and  steel  works  of  the  South,  general  farm- 
ing, fruit  and  tobacco  belts.  Within  the  Lake  Region  lie  the 
vehicle  and  agricultural-implement  industries  and  the  mining  and 
smelting  districts  of  the  Great  Lakes.  The  vast  empires  of 
wheat,  corn,  and  other  grain  and  dairy  farms  are  included  in  the 
Central.  Our  great  sugar,  rice,  and  cotton  plantations  and  the 
stock-raising  industry  center  in  the  Southwestern  Region,  while 
the  grain  and  fruit  belts  of  the  Northwest,  the  cattle  ranges 
west  of  the  Rockies,  and  the  fruits  of  the  Pacific  Coast  are  within 
the  boundaries  of  the  Western  Region.4 

49.  Character  of  Market. — There  is  also  what  may  be 
called  the  character  of  the  market,  from  the  point  of  view 
of  ultimate  demand.  On  this  basis,  there  will  be  the  city 
market,  the  town,  or  village  market,  and  the  country  dis- 
tricts.    Fertilizers  are  destined  for  the  farm.     Road  ma- 

*See  Chiquoine,  Public  Ledger,  Philadelphia,  Dec.  24,  1916. 


ANALYSIS  OF  THE  MARKET  53 

terials  are  for  the  country  roads.  Food  demand  concen- 
trates in  the  city.  Each  demand  has  its  peculiar  char- 
acteristics. As  will  be  shown  later,  there  is  group  in- 
dividuality in  demand  that  reaches  in  influence  back  to 
producer.  It  affects  in  the  process  the  entire  market 
structure. 

50.  Historical  Considerations. — Just  as  production 
should  be  studied  historically,  in  order  to  discover 
tendencies  and  thus  afford  material  for  discounting  future 
changes,  so  the  historical  aspects  of  demand  must  be  con- 
sidered. Changes  will  develop,  due  either  to  (a)  popula- 
tion movements,  (b)  a  rise  or  fall  in  the  standard  of  living, 
or  (c)  a  shift  in  tastes,  habits,  or  relative  desires. 

In  the  development  of  a  new  country  immigration  flows 
in  and  spreads  out  to  all  parts.  By  fortuitous  circum- 
stance the  early  ingress  into  the  United  States  was  on  a 
"stern  and  rockbound  coast."  Later  the  fertile  interior 
drained  off  the  Eastern  population,  and  then  the  West  and 
Northwest  attracted  the  people  from  the  Middle  West. 
Always  market  conditions  have  changed  to  adapt  them- 
selves to  these  population  movements.  Transportation, 
communication,  and  finance  developed  at  the  same  time. 
Currents  of  trade  in  the  past  have  been  east  and  west ;  in 
the  future  they  may  be  north  and  south.  If  so,  market 
facilities  will  adjust  themselves  to  the  change.  There  may 
come  a  back  flow,  too,  with  its  effects.  These  large  move- 
ments within  the  country  and  even  in  the  international 
market  should  be  followed,  and  their  effect  upon  the  mar- 
kets noted. 

A  standard  of  living  is  an  indefinite  thing,  almost  wholly 
relative  in  character.  There  may  be  at  some  point  an  irre- 
ducible minimum,  but  this  is  always  and  everywhere  to  be 
avoided.  Standards  of  living  rise  with  increased  pur- 
chasing power.  With  such  changes,  luxuries  become  neces- 
sities, and  new  desires  are  awakened.    These  are  reflected 


54  MARKETING 

through  market  centers  upon  production.  In  a  new  coun- 
try there  are  as  broad  movements  in  the  standards  of  living 
as  in  population.  Swift  changes  occur,  also,  in  districts 
where  oil  is  struck  or  where  a  new  industry  is  developed ; 
the  running  of  a  railroad  through  a  new  country  has  a 
similar  effect. 

Waves  of  prosperity  follow  population  movements.  As 
the  "Star  of  Empire"  takes  its  westward  way,  there  may 
be  left  behind  a  deflated  business.  With  the  old  prosperity 
has  departed  the  requisite  purchasing  power. 

The  standard  of  living  in  such  districts  will  sink  to  a 
lower  level.  The  market  is  changed;  demand  is  altered. 
Effects  of  this  sort  must  be  watched  and  provided  for. 

While  a  great  volume  of  consumer  demand  flows  steadily 
on  from  year  to  year,  there  are  many  shifts  in  tastes,  habits, 
and  wants.  Unless  a  manufacturing  plant  can  readjust 
itself  to  such  shifts,  it  will  no  longer  be  a  market.  One 
plant  had  expanded  tremendously  during  the  war  to  meet 
the  demand  for  war  materials  and  turned  to  the  making 
of  hardware  implements  afterward.  There  was  no  lessen- 
ing of  this  market  for  materials.  A  planing  mill  shifted 
to  the  making  of  fruit  crates  that  were  especially  needed 
at  the  time.  By  this  shift  the  mill  became  an  even  greater 
consumer  of  lumber  than  before.  The  substitution  of  soft 
drinks,  cider,  candy,  and  tobacco  for  "strong  drink"  has 
affected  the  marketing  of  materials.  The  development  of 
a  demand  for  corn  products  has  become  great  enough  to 
have  an  appreciable  effect  on  the  immense  yield  of  that 
grain.  The  widespread  use  of  aluminum  utensils  has 
greatly  affected  the  marketing  of  the  raw  materials.  Asbestos 
is  entering  into  an  increasing  number  of  articles  and 
the  marketing  of  the  raw  material  is  affected.  The  un- 
usual demand  for  silver  in  the  arts  and  for  coins  has  revived 
old  sources  of  production.  The  unprecedented  demand  for 
nitrates  caused  the  development  of  a  new  source  from  the 


ANALYSIS  OF  THE  MARKET  55 

air.  A  great  number  of  modern  inventions  call  for 
petroleum  products.  It  is  a  part  of  the  problem  of  market- 
ing raw  materials  to  keep  in  touch  with  these  changes. 

In  this  connection  it  is  proper  to  consider  the  subject  of 
substitutes.  Substitution  may  take  the  form  of  a  new 
source  or  of  a  new  substance.  That  is,  a  substitute  may  be 
developed  as  a  result  of  a  more  complete  utilization  of  by- 
products, as  illustrated  in  the  meat  industry,  and  in  the 
petroleum  industry,  or  an  entirely  new  material  may  be 
found  adapted  to  an  established  demand.  The  latter  con- 
dition is  frequent.  Platinum  may  supplant  gold  in  cer- 
tain ornaments;  wood  fiber  and  nettles  may  take  the 
place  of  cotton  and  wool  in  textile  manufacturing,  as  in 
Germany ;  a  synthetic  rubber  may  be  made.  The  instances 
might  be  greatly  multiplied.  Every  such  change  will 
obviously  reach  back  in  influence  through  the  market. 
Thousands  of  active  minds  are  seeking  persistently,  tire- 
lessly, to  develop  new  substitutes  of  both  kinds.  Scientific 
knowledge  is  becoming  a  more  and  more  fruitful  source  of 
substitutes.  It  is  not  a  process  to  be  condemned,  but  to 
be  watched ;  it  is  an  active  element  in  the  market. 

The  purpose  in  following  the  historical  development  of 
an  industry  is  to  be  in  a  position  to  anticipate  changes. 
Business  is  too  prone  to  succumb  to  easily-established  tra- 
dition. A  broad  view  of  market  development  is  the  best 
possible  corrective  for  hidebound  tradition.  It  gives  back- 
ground, perspective,  confidence,  and  a  superior  basis  for 
judgment.  The  historical  sense  of  the  American  business 
man  needs  nurturing.  Commercial  and  industrial  history 
contains  many  an  important  lesson ;  from  the  accumulation 
of  experience  will  emerge  at  last  sound  and  dependable 
principles  of  business.  It  has  a  strong  practical  bearing, 
too,  in  that  such  a  survey  will  reveal  the  broad  changes 
discussed  above.  As  early  as  possible,  it  is  necessary  to 
mark  the  trend  toward  a  general  increase  or  a  general 


56  MARKETING 

decrease  in  market  demand,  or  whether,  indeed,  the  demand 
is  a  fairly  stabilized  one  and  why. 

51.  Climatic  Considerations. — The  climate  is  a  most 
important  commercial  consideration.  This  is  true  not  only 
for  the  great  farm  products  which  the  uncertain  and  un- 
controllable weather  changes  make  so  speculative,  but  also 
in  only  a  less  degree  for  all  commodities.  It  is  said  that 
in  Boston,  if  in  a  series  of  hot  days  the  wind  veers  to  the 
east,  the  demand  for  milk  falls  sometimes  by  20,000  quarts 
in  a  single  day.  The  effect  upon  the  demand  for  ice  of  a 
cool  or  hot  summer  is  obvious.  Many  other  climatic  con- 
siderations are  almost  equally  as  influential,  if  not  so 
obvious.  Coal,  gas,  wood  for  heat;  building  material  for 
shelter;  clothing  material  to  wear — all  of  these  depend 
directly  upon  climatic  considerations.  In  other  cases  de- 
mand fluctuates  directly  with  climatic  changes.  This  factor 
may  be  of  no  particular  or  of  vital  importance.  It  is  the 
burden  of  each  special  investigation  to  determine  this  fact. 

52.  Seasonal  Considerations. — There  are  seasonal  factors 
in  demand  as  well  as  in  supply.  These,  too,  must  come 
under  the  survey.  Coal  for  winter,  ice  for  summer,  are 
obvious  illustrations.  Material  for  woolen  clothing  when 
the  weather  grows  cold;  cotton  material  for  hot  weather; 
the  whole  series  of  seasonal  trades — all  are  in  the  same 
category.  It  is  well  known  that  this  element  in  demand 
complicates  the  problem  of  industrial  management,  of 
unemployment. 

This  fluctuation  in  demand  may  be  due  either  to  chang- 
ing needs  or  to  other,  external  factors.  Farmers  may  con- 
centrate their  buying  after  harvesting  and  selling  the 
crops.  The  payday  is  a  widespread  and  potent  factor  in 
demand  variations.  The  manufacturer  may  wait  until  he 
gets  an  order  before  buying  materials.  This  element  in 
demand  is  well  known  and  readily  observed,  although  its 
importance  is  not  often  enough  appreciated. 


ANALYSIS  OF  THE  MARKET  57 

The  burden  of  leveling  out  this  concentrated  or  sea- 
sonal demand  rests  upon  the  market.  It  often  happens 
that  a  seasonal  supply  of  material  is  separated  by  six 
months  from  the  peak  of  demand.  This  is  true  of  cotton 
in  the  Northern  climate.  But  this  period  allows  the  manu- 
facture and  distribution  of  cotton  garments  in  time  for  the 
warm  season.  Wool  shearing  may  come  in  the  spring 
while  the  demand  for  wool  clothing  begins  in  the  autumn. 
Ice  is  formed  in  winter  while  the  peak  of  demand  comes 
in  the  mid-summer.  This  lack  of  synchronizing  is  taken 
care  of  in  the  market  organization. 

Where  the  supply  is  readily  controlled  and  regulated  this 
is  not  so  difficult.  It  is,  nevertheless,  practically  impossible 
to  get  householders  to  buy  their  supply  of  coal  for  the 
winter  until  the  "frost  is  on  the  punkin,  and  the  fodder 
in  the  shock."  Demand  persists  in  being  seasonal  even 
though  the  recurrence  of  the  demand  is  beyond  question. 
The  shock  absorber  over  these  bumps  of  demand  and  supply 
is  the  ' '  trade. ' ' 

53.  Financial  and  Market  Relationship. — As  has  been 
noted  before,  the  two  pervasive  elements  in  the  economic 
process  are  transportation  and  finance.  The  former  will 
be  especially  considered  in  a  later  chapter,  but  something 
should  be  said  here  of  the  latter.  Nothing  can  cut  off  de- 
mand more  peremptorily  than  a  financial  panic.  Finance 
is  a  most  sensitive  barometer  of  trade. 

The  financial  situation  may  be  affected  by  many  different 
things.  Among  the  most  important  is  a  crop  failure.  This 
disaster  spreads  quickly  through  the  entire  market  fabric, 
just  as  when  a  stone  is  thrown  into  a  mill  pond.  A  new 
crop  means  renewed  purchasing  power  among  a  very  large 
group  of  consumers.  The  demand  thus  created  acts  through 
the  market  upon  many  kinds  of  materials.  It  is  like  a 
transfusion  of  new  life-blood  into  the  system.    The  reverse 


58  MARKETING 

is  true  if  there  is  a  crop  failure.  A  deadening  influence 
spreads  through  the  economic  system. 

Some  trades,  that  is,  some  kinds  of  demand,  are  far  more 
sensitive  than  others.  The  building  trades  are  among  the 
tirst  to  suffer,  and  the  demand  for  building  materials  slumps 
quickly.  The  pig-iron  trade  is  looked  upon  as  a  barometer 
because  of  its  immediate  and  sensitive  response  to  financial 
changes.  This  is  because  of  its  fundamental  character;  it 
underlies  so  many  other  industries.  In  general,  luxuries 
naturally  react  more  quickly  and  more  violently  than  neces- 
sities ;  novelties  more  quickly  and  violently  than  staples. 

Each  commodity  will  shoAV  its  own  peculiar  traits.  De- 
mands are  pyramided  upon  demands.  Business  is  an  in- 
tricate, correlated  and  interrelated  system.  A  famine  in 
India  may  affect  the  silver  market  in  the  United  States. 
A  stoppage  of  the  importation  of  human  hair  from  China 
may  have  an  unexpected  influence  upon  the  cotton-seed 
industry  in  this  country,  because  this  material  is  essential 
to  the  making  of  press  cloth  for  straining  cotton-seed  oil. 
It  is  into  this  complex  but  fascinating  maze  that  the  stu- 
dent of  marketing  problems  must  plunge. 

How  does  the  demand  for  a  given  commodity  act  in  a 
crisis  or  a  panic?  Those  last  days  of  July,  1914,  at  first 
stunned  the  Chicago  Board  of  Trade.  Demand  withered 
away  like  a  tender  plant  before  a  wintry  blast.  Then 
suddenly  it  sprang  to  life  again.  A  frenzy  of  buying 
succeeded  stagnation.  These  wild  periods  in  a  market  are 
largely  due  to  ignorance.  He  who  has  made  himself 
familiar  with  the  conditions  of  supply,  who  has  carefully 
analyzed  demand,  can  weather  such  a  period  calmly  from 
the  simple  fact  that  he  has  already  discounted  the  changes. 

54.  Conclusion. — The  complement  of  an  analysis  of  the 
commodity  is  an  analysis  of  the  market.  As  applied  to  raw 
materials  and  foodstuffs,  the  study  of  demand  may  be  con- 
centrated in  market  centers  through  which  the  ultimate, 


ANALYSIS  OF  THE  MARKET  59 

consumer  demand  makes  itself  felt.  This  means  a  study 
of  the  size,  location  and  character  of  trade  centers.  Raw 
materials  flow  from  their  source  to  the  mill ;  for  them  the 
mill  is  the  market.  Foodstuffs  are  drawn  from  regions  of 
surplus  to  regions  of  deficiency.  The  regions  of  deficiency 
vary  in  intensity  directly  with  the  density  of  population. 
The  larger  the  cities,  the  larger  the  market.  With  this  sur- 
vey completed,  one  is  ready  to  proceed  to  an  analysis  of  the 
problems  that  arise  in  bringing  the  supply  into  contact  with 
the  demand. 

Suggestions  for  Study 

The  discussion  in  this  chapter  should  be  applied  to  the 
commodity  selected  by  each  student  for  research  work. 
For  class-room  discussion  the  following  assignments  will 
serve: 

1.  Locate  on  the  base  map  already  used  for  the  productive 
regions,  the  chief  primary  and  terminal  markets  for  (a) 
cotton,  (&)  wheat,  (c)  livestock,  (d)  petroleum,  or  other 
commodity. 

Beferences : 

United  States  Atlas. 

Thirteenth  Census,  vol.  v,  x,  p.  39-,  337-,  657-. 
Reports  of  U.  S.  Geographical  Survey. 
Huebner,  Agricultural  Commerce,  pp.  94-100,  116-26, 
50-61,  164-170,  181-187. 

2.  Study  these  market  centers  in  reference  to  productive 
area,  to  centers  of  population. 

3.  List  in  order  of  importance  the  commercial  reasons  for 
the  location  of  the  mai'kets.  Do  you  find  evidence  of 
"artificial"  markets'? 

4.  Try  to  determine  the  "natural"  boundaries  for  these  mar- 
ket areas. 

5.  Is  there  an  overlapping  of  market  areas'? 

6.  What  are  the  most  important  climatic  and  seasonal  con- 
siderations affecting  each  commodity  studied? 


60  MARKETING 

7.  What  are  the  effects  of  population  movements  upon  the 
demand  for  each  commodity? 

8.  What  elasticity  is  there  in  the  demand  for  each   com- 
modity?    How  evidenced? 

9.  Is  there   evidence   that   production   and   market    demand 
are  approaching  an  equilibrium? 

10.     In  consideration  of  the  facts  secured,  what  is  your  judg- 
ment as  to  the  future  of  the  market  centers? 


CHAPTER  IV 


TRADE  ORGANIZATION 


Given  a  commodity  and  a  market,  what  is  the  mechanism 
that  has  developed  for  bringing  the  two  together  ?  In  any- 
complex  society  this  bringing  of  supply  into  contact  with 
demand  requires  specialized  service.  This  specialized  serv- 
ice will  develop  its  own  peculiar  type  of  machinery  for 
performing  the  necessary  tasks.  This  machinery  is  the 
trade  organization. 

At  the  outset,  it  must  be  kept  clearly  in  mind  that  a 
trade  organization  is  not  a  fixed  or  permanent  thing;  the 
existing  organization  is  not  the  best  or  the  worst  possible, 
but  is  an  attempt  to  do  a  required  service  effectively.  Busi- 
ness is  in  its  very  essence  selfish,  in  that  it  runs  upon  a  basis 
of  profits.  The  men  behind  the  trade  organization  are  not 
philanthropists;  they  are  in  business  for  pecuniary  gains; 
they  will  demand  a  reward  for  their  services.  The  task 
of  a  business  investigator  is  to  inquire  whether  or  not  their 
services  are  real,  what  the  nature  of  these  services  is,  what 
the  reward  paid  for  them,  and  what  defects  are  apparent 
in  the  mechanism  that  has  developed  to  facilitate  distribu- 
tion. 

55.  Functions  and  Institutions. — A  distinction  has 
already  been  drawn  between  functions,  the  services  neces- 
sary for  distribution,  and  the  institutions  with  which  these 
functions  are  associated.  The  terminology  in  this  connec- 
tion is  unfortunate,  because  the  language  may  carry  a 
variety  of  meanings.  But  it  should  be  understood  at  this 
point  that  the  following  discussion  of  the  trade  organization 

61 


62  MARKETING 

for  marketing  raw  materials  and  foodstuffs  will  be  based 
chiefly  upon  a  functional  analysis. 

56.  Market  Functions. — What  are  the  services  to  be  per- 
formed in  carrying  commodities  to  market?  They  have 
varied  at  different  times  in  character  and  in  importance. 
New  ones  have  emerged  as  industrial  society  has  grown 
more  complex.  Now  and  again  a  phase  of  the  distributive 
function  has  been  isolated  and  specialized.  The  rudiments 
of  practically  all  services  were  present  in  the  simplest  and 
most  primitive  kind  of  trade  organization.  The  identifica- 
tion and  specialization  have  taken  place  more  or  less  slowly 
and  the  whole  process  has  been  so  matter-of-fact,  so  natural 
and  commonplace  as  not  to  have  drawn  any  special  atten- 
tion to  itself. 

The  present  distributive  system,  then,  is  the  result  of 
growth  and  of  gradual  modifications.  It  is  not  now  and 
never  has  been  fixed  or  stable.  Through  the  years  of  com- 
petition, there  has  been  a  slow,  relentless  tendency  to 
eliminate  uneconomical  methods.  To-day  there  is  visible 
everywhere  evidence  of  change.  This  is  a  sign  of  progress, 
for  without  change  business  stagnates.  Two  contending 
forces  are  at  work,  one  toward  greater  specialization, 
another  toward  a  concentration  of  functions.  The  banker, 
the  transporter,  the  wholesaler,  the  retailer,  the  insurer, 
all  have  taken  unto  themselves  specialized  functions.  At 
the  same  time,  as  the  distributive  system  grows  more  com- 
plex, "the  middleman  tends,  by  the  development  of  his  own 
efficiency,  to  eliminate  himself  from  trade. ' ' * 

It  will  be  worth  while  to  note  the  effects  of  this  double 
tendency  in  business. 

A  careful  study  has  been  made  of  the  rise  of  the  middle- 
man in  English  trade.  From  this  historical  point  of  view 
the  following  general  comments  on  market  functions  have 
been  made: 

1  Westerfield,  Middlemen  in  English  Business,  p.  127. 


TRADE  ORGANIZATION  63 

Commerce  consists  in  the  equalization  and  distribution  of  sur- 
plus goods  as  between  persons  in  different  places  and  different 
times.  These  ends  are  accomplished  by  carriage,  storage,  fore- 
sight, communication,  and  exchange.  The  agents  of  these  acts 
are  the  merchants,  tradesmen,  and  brokers.  Of  two  persons  or 
two  places,  the  one  receives  a  succor  which  is  relatively  necessary 
to  it,  by  exchanging  a  surplus  which  is  relatively  useless  to  it 
against  the  goods  of  which  it  is  needy. 

These  functions  may  be  grouped  in  two  classes.  The  middle- 
man buys  with  some  distant  or  future  market  in  view.  As  far  as 
the  future  market  is  the  objective  one,  the  business  is  purely 
speculative  and  rests  on  the  control  of  capital.  This  dealing  in 
time-markets  may  be  regarded  as  the  "capitalistic"  function.  But 
when  this  future  market  is  also  a  geographically  distant  one,  a 
second  function  is  called  into  play,  namely,  the  discovery,  study, 
and  fostering  of  that  market  and  the  connecting  of  the  local  and 
distant  markets.  This  dealing  in  place-markets  may  be  called 
the  "connective"  function.  It  is  concerned  with  the  methods  of 
business  connection  and  the  means  and  use  of  communication.2 

The  functions  isolated  by  this  analysis  are:  "carriage," 
that  is  transportation;  "storage"  or  warehousing;  "fore- 
sight," by  which  is  meant  presumably  speculation;  "com- 
munication," whether  secured  by  letter,  wire,  or  travel; 
and  "exchange,"  or  the  actual  buying  and  selling.  While 
these  terms  are  not  mutually  exclusive,  they  mark  a  begin- 
ning of  the  separation  of  functions.  The  distinction  made 
between  time-markets  and  place-markets,  between  the 
"capitalistic"  function  and  the  "connective"  function  is 
well  worth  remembering. 

The  results  of  another  attempt  to  enumerate  the  func- 
tions involved  in  marketing  are  given  below : 

The  services  performed  in  the  marketing  process,  including 
practically  every  item  in  the  detailed  expense  account  of  a  mer- 
chant or  of  the  selling  organization  of  a  manufacturer,  can  be 

2  Ibid.,  p.  349. 


64  MARKETING 

classified  under  one  of  the  following  beads:  (1)  assembling;  (2) 
storing;  (3)  assumption  of  risks;  (4)  financing;  (5)  rearrange- 
ment; (6)  selling;  and  (7)  transportation.  Tbe  only  important 
exception  to  tins  classification  is  the  expense  connected  with  ac- 
counting and  office  management,  or  what  Shaw  calls  "the  facili- 
tating activities"  of  a  business.  But  these  are  purely  incidental 
to  the  primary  functions  enumerated  above,  and  may  properly 
be  considered  as  assignable  to,  or  incurred  in  connection  with, 
their  performance.3 

The  analysis  is  here  carried  several  steps  further.  It  is 
found  necessary  also  to  define  very  generously  some  of  the 
terms  used.  "Assembling,"  for  instance,  does  not  at  once 
convey  to  the  mind  the  fact  that  it ' '  involves  all  the  services 
connected  with  buying."  It  would  never  occur  to  the 
casual  reader  to  make  it  the  complement  of  selling.  Nor 
does  the  significance  of  "rearrangement"  make  itself  imme- 
diately intelligible.  As  a  matter  of  fact  it  "involves  sort- 
ing, grading,  breaking  up  large  quantities  into  small  units, 
packing,  etc." 

These  are  noteworthy  attempts  to  isolate  the  functions 
that  must  be  performed  in  getting  goods  to  market.  It  is 
not  with  the  thought  of  analyzing  more  keenly  or  deeply, 
but  with  a  desire  to  present  the  exposition  more  clearly, 
that  an  independent  list  of  functions  is  made  here.  This 
discussion  of  the  marketing  of  raw  materials  and  foodstuffs 
aims  at  emphasizing  the  control  of  and  the  assumption  of 
risks  for  these  commodities  in  the  process.  It  will  follow 
the  topics  as  given  below. 

57.  The  Middleman. — This  discussion  will  define  the 
most  important  types  of  middlemen  and  will  describe  their 
functions.  Among  middlemen  there  are  the  buyers  and 
sellers  in  the  local  market  and  the  buyers  and  sellers  in  the 
wholesale  market.  The  local  buyers,  the  commission  mer- 
chant, the  broker,  the  forwarder,  the  general  consignee, 

'  Weld,  American  Economic  Review,  June,  1917,  p.  306. 


TRADE  ORGANIZATION  65 

and  the  "  dealer, ' '  or  retailer  are  all  middlemen.  Attention 
will  be  centered  upon  the  wholesale  market  and  its  middle- 
men. 

58.  The  Transportation  Function. — The  point  of  view 
here  is  a  consideration  of  transportation  as  a  commercial 
problem.  What  the  general  business  man  needs  to  know 
of  rate  regions  and  rate  structures,  of  rate  schedules,  of 
special  cars,  of  routing  and  demurrage,  of  trolley  lines  and 
the  truck  service,  will  be  touched  upon.  Something  will 
be  indicated,  too,  of  the  importance  of  the  transportation 
factor  in  the  marketing  of  raw  materials  and  foodstuffs. 

59.  Organized  Exchanges. — There  will  be  a  discussion 
of  the  function  of  exchanges,  as  well  as  of  their  develop- 
ment and  organization.  The  different  kinds  of  exchanges, 
so  broadly  treated  as  to  include  the  organized  produce 
market,  the  stockyards,  the  butter  and  egg  board,  the  auc- 
tion, and  the  iron  and  steel  institute,  will  be  briefly  de- 
scribed. It  will  be  necessary,  also,  to  indicate  the  influence 
of  speculation  through  exchanges  upon  the  marketing 
problem.  Here,  too,  belongs  a  discussion  of  the  cooperative 
marketing  movement. 

60.  The  Warehousing  Industry. — The  remarkable  de- 
velopment of  the  warehousing  industry  will  be  described. 
An  analysis  will  be  made  of  the  storage  function  in  modern 
business.  The  types  of  warehouses,  such  as  the  general 
mercantile  warehouses,  the  bonded  warehouses,  the  grain 
elevators,  cold  storages,  stockrooms,  will  be  indicated. 
There  are  definite  problems,  mechanical,  commercial,  and 
legal,  connected  with  the  warehouse.  These  will  be  touched 
upon.  The  place  of  the  warehouse  in  commercial  organiza- 
tion will  be  discussed. 

61.  Commercial  Grading  and  Inspection  of  Commodities. 
— The  whole  realm  of  establishing  grades,  of  inspecting 
and  weighing  commodities  needs  thorough  investigation. 
Something  has  been  done  already  in  determining  the  stand- 


66  MARKETING 

aid  grades  of  two  or  three  great  staple  products;  industrial 
chemists  are  making  progress  with  certain  minerals  and 
metals.  Scientific  commercial  standards  are  yet  to  be  set. 
In  this  discussion  the  problem  will  be  outlined,  and  the 
method  of  approach  will  be  suggested.  There  will  be 
description  of  the  machinery  for  grading,  weighing,  inspect- 
ing; of  the  scientific  tests  for  setting  standards;  of  the 
relation  of  the  government  to  commercial  grading;  of  the 
effects  upon  the  commodity  and  upon  the  commercial  organ- 
ization. The  relation  of  the  consumer  to  standard  grades 
will  be  discussed. 

62.  Market  News. — The  function  of  market  news  in  the 
modern  system  will  be  taken  up,  and  its  fundamental  char- 
acter will  be  demonstrated.  The  thesis  to  be  developed  is 
that  business  is  a  going  concern,  that  prices  are  not  made 
from  the  ground  up  day  by  day,  that  to-day's  price  is  yes- 
terday's price  modified  only  as  a  result  of  some  informa- 
tion from  the  field  of  production  or  consumption,  i.e.,  market 
news.  Something  will  be  said  of  the  machinery  for  collect- 
ing and  disseminating  market  news,  by  the  government  and 
by  private  agencies,  something  of  the  control  of  trade  infor- 
mation, the  discounting  of  the  future  on  the  basis  of  mar- 
ket news,  the  transformation  of  business  facts  into  market 
news,  and  the  relation  of  market  news  to  competition.  The 
possibilities  to  use  and  to  abuse  trade  information  will  be 
dealt  with. 

63.  Market  Price. — The  analysis  of  market  price  will  be 
taken  up.  The  function  of  market  price  will  be  shown, 
and  the  price  factors  and  influences.  There  are  prices  at 
the  local  markets,  the  primary  markets,  and  the  terminal 
markets.  There  are  wholesale  prices,  retail  prices,  and  con- 
sumers' prices;  there  are  methods  of  determining  and  of 
quoting  prices;  there  are  price  "steps"  or  intervals,  and 
there  is  the  "spread"  between  the  price  to  the  producer 
and  the  price  to  the  consumer.     All  of  these  things  will 


TRADE  ORGANIZATION  67 

come  under  survey.  It  will  be  shown  how  price  is  the  axis 
of  commercial  organization.  The  movement  toward  a  stand- 
ard price  through  trade  organizations  will  be  traced.  Our 
experience  with  price  fixing  and  our  conception  of  a  "  fair ' ' 
price  will  be  discussed. 

64.  Financing  Distribution. — A  brief  discussion  will  be 
given  of  the  financial  instruments  used  in  marketing,  such 
as  the  bill  of  exchange,  the  bill  of  lading,  the  warehouse 
receipt,  and  the  trade  acceptance.  There  will  be  a  summary 
of  the  function  of  credit  instruments.  The  method  of  ship- 
ping on  consignment  will  be  analyzed,  and  the  costs  of 
marketing  will  be  discussed. 

It  is  on  the  basis  of  these  functions  that  the  discussion 
in  the  succeeding  chapters  will  run.  One  and  all,  these 
are  fundamental  marketing  functions;  they  apply  to  the 
marketing  of  finished  products  as  well  as  to  the  marketing 
of  raw  materials  and  foodstuffs.  This  functional  analysis, 
however,  is  made  in  the  section  dealing  with  raw  materials 
and  foodstuffs  because  of  expediency. 

There  is  greater  functional  specialization  in  marketing  farm 
products  than  in  marketing  manufactured  products;  in  other 
words,  farm  products  pass  through  the  hands  of  a  greater  num- 
ber of  successive  middlemen.  Furthermore,  there  is  a  distinct 
tendency  in  the  selling  of  manufactured  products  toward  the 
"elimination  of  the  middlemen,"  or  rather  toward  the  taking  over 
of  the  marketing  functions  by  producers — a  tendency  that  is  not 
apparent  in  the  handling  of  farm  products.  In  the  farm-prod- 
ucts trade,  for  example,  there  is  usually  a  country  shipper — a 
middleman  who  has  no  counterpart  in  the  manufactured-goods 
trade.  Also  the  wholesale  distribution  of  farm  products  is  com- 
monly divided  between  two  agents — the  wholesale  receiver,  or 
commission  merchant,  who  assembles  large  quantities  from  various 
and  far-away  localities;  and  the  jobber,  who  sells  in  small  quan- 
tities to  hundreds  of  retailers.  In  the  wholesale  trade  in  manu- 
factured products  there  is  no  such  important  division  between 
two  functional  specialists,  although  the  commission  house,  manu- 


68  MARKETING 

facturer's  agent,  and  broker,  described  above,  sometimes  appear 
between  manufacturer  and  wholesaler.4 

65.  Trade  Organization  Modified  by  Commodity. — 
Every  trade  organization  has  its  peculiar  devices  to  care 
for  the  peculiar  needs  of  marketing  the  commodity  or  com- 
modities handled.  Cotton,  which  is  grown  by  about 
1,700,000  growers,  ginned  by  25,000  ginneries,  stored  at 
2,600  public  storage  places,  and  consumed  by  2,100  estab- 
lishments, has  one  of  the  most  complicated  of  the  American 
farm-crop  producing  systems.  Coal,  iron  ore,  petroleum, 
salt,  aluminum,  copper,  lead  have  relatively  simple  market- 
ing systems.  One  is  simple  and  the  other  complex  for  an 
economic  reason.  It  obviously  is  easier  to  control  output, 
to  adjust  production  to  market  demand  under  centralized 
direction  in  the  mining  of  ores  and  minerals  than  it  is  in 
the  raising  of  farm  crops.  There  is  no  more  uncertain, 
speculative  business  in  the  world  than  handling  farm 
products.  The  marketing  process,  therefore,  is  divided  and 
subdivided  until  a  great  cumbersome  organization  is  the 
result. 

As  market  conditions  become  stabilized  the  trade  organi- 
zation tends  to  become  simplified.  When  risks  are  great 
and  marketing  problems  are  difficult  and  complex,  the  trade 
organization  tends  to  develop  in  complexity.  The  market- 
ing of  milk  is  simple;  the  marketing  of  wheat  is  complex. 
The  former  has  for  each  market,  itself  of  limited  area,  a 
narrowly  limited  area  of  production;  the  latter  a  far- 
flung  productive  area  and  an  international  market.  Wheat 
is  affected  in  production  and  in  its  markets  by  world  forces. 
Milk  is  affected  predominantly  by  local  forces. 

Because  a  trade  organization  has  a  definite  series  of 
problems  to  solve,  such  as  problems  arising  from  a  certain 
commodity  or  a  related  line  of  commodities,  it  must  adapt 

*Weld,  American  Economic  'Review,  June,  1917,  p.  316. 


TRADE  ORGANIZATION  69 

itself  to  meet  them.  Hay  has  a  loose- jointed  trade  organiza- 
tion because  of  the  character  of  the  commodity  and  because 
there  are  certain  widely  divergent  demands.  Each  demand 
has  created  its  own  type  of  marketing  machinery.  The 
marketing  of  eggs  gives  evidence  of  becoming  a  subsidiary 
activity  of  the  meat  packers.  One  reason  is  that  there  was 
already  in  existence  a  system  of  marketing  machinery  which 
could  be  readily  and  effectively  adopted  for  handling  them. 
In  crushed  stone  there  has  lately  been  a  great  increase  in 
direct  selling,  because  dealings  have  been  more  commonly 
in  carload  lots. 

The  trade  organization  for  any  given  commodity  will  be 
affected  by : 

1.  The  size  of  the  productive  area. 

2.  The  character  of  the  commodity. 

3.  The  location  of  markets  relative  to  the  productive  area. 

4.  The  character  of  the  demand. 

66.  Strategic  Points  in  Marketing. — A  recent  writer  has 
said  that  in  the  Middle  Ages  there  were  Crag  Barons,  who 
built  the  fortified  castles  on  crags  overlooking  the  main 
highways  to  market.  From  these  castles  they  sent  down 
their  armed  retainers  to  stop  every  passer-by  and  demand 
a  toll  before  granting  permission  to  go  on.  To-day,  he 
added,  there  are  no  longer  Crag  Barons,  but  in  their  places 
are  Bag  Barons,  who  have  thrown  a  fence  about  the  mar- 
kets and  demand  toll  of  every  passer-by.  Bags  and  Crags, 
he  avers,  have  the  same  effect  on  Rags. 

This  analogy  was  used  against  the  large  corporations. 
Whatever  truth  there  may  be  in  it,  the  figure  does  call 
attention  to  an  important  fact.  Every  commodity  on  its 
way  from  producer  to  consumer  passes  certain  points  where 
it  is  most  vulnerable  to  attack.  These  are  strategic  points ; 
that  is,  places  at  which  control  of  the  volume  of  production 
or  of  the  market  is  possible.    This  means  that  certain  func- 


70 


MARKETING 


tions  are  essential  and  can  be  performed  only  by  a  certain 
moans  or  at  a  certain  place.  Transportation  and  finance 
have  most  often  probably  been  the  strategic  functions.  The 
producers  of  wheat  still  retain  their  animosity  toward  the 
railroads  from  the  period  of  the  Granger  movement.  When 
the  railroads  were  declared  public  utilities,  the  elevators 


CHART  OF  CHANNELS   OF   FOOD   DISTRIBUTION 

became  strategic.  To  defend  the  producers  against  these, 
there  was  passed  in  Illinois  the  Warehouse  Law  declaring 
all  warehouses  to  be  public  utilities,  and  the  farmer's  ele- 
vators were  built.  The  oil  pipe-lines  gave  the  Standard 
Oil  Company  such  a  marketing  advantage  that  they  too 
were  declared  public  utilities. 

In  every  marketing  organization,  there  are  these  strategic 
points.  It  may  be  the  refrigerator  car,  as  in  the  case  of 
meat  and  fruits;  it  may  be  the  jobbers  in  the  case  of 
bituminous  coal  or  the  mine  operators  in  that  of  anthracite ; 
it  may  be  the  jobber  and  finder,  as  in  leather;  it  may  be 
the  warehouse  man,  as  in  wool;  it  may  be  the  exchange 
or  the  control  of  market  news.    Whatever  and  wherever 


TRADE  ORGANIZATION 


71 


these  vulnerable  points  are,  there  will  always  occur  a 
struggle  for  control  and  of  defense. 

67.  Trade  Organization  Chart. — A  sufficiently  broad 
survey  and  detailed  study  will  furnish  data  for  construct- 
ing an  organization  chart  for  the  marketing  of  each  com- 
modity. This  chart,  if  carefully  done,  will  reveal  the  points 
of  advantage  in  the  marketing  process.  The  chart  on 
page  70  is  an  attempt  to  show  the  main  food  sales  channels 
from  the  source,  the  producer,  through  the  importer,  and 
the  manufacturer,  or  the  packer,  to  the  consumer. 

The  typical  organization  for  farm  products  has  been 
outlined  as  follows: 


Producer 


Local  Buyer 


Commission  Man 

or 

Wholesaler 


Retailer 


Consumer 


MARKET  ORGANIZATION   CHART  FOR  FARM   PRODUCTS 


This  organization  chart  shows  only  the  chief  function- 
alized  middlemen  and  not  the  institutions  which  have 
grown  up  around  them.    A  more  nearly  complete  diagram 


72  MARKETING 

would  contain  transportation,  storage  houses,  exchanges, 
ginneries,  refineries,  blenders,  graders,  financiers,  etc.  The 
warning  should  possibly  be  sounded  to  the  effect  that  the 
diagrams  here  given  were  constructed  for  particular 
emphasis. 

68.  Types  of  Trade  Organization. — Some  examples  of 
trade  organizations  are  cited  here.  The  sketch  in  each  case 
gives  merely  the  outline,  the  critical  problems  not  being 
even  indicated. 

Beans 

Beans  must  be  considered  both  as  a  truck  crop  and  as  a  dried 
product.  Beans  for  immediate  consumption  in  a  green  state,  as 
snap  or  string  beans,  are  extensively  produced  throughout  the 
entire  trucking  area.  They  are  sometimes  sold  in  a  limited  way 
to  local  buyers  or  shippers,  sometimes  handled  in  connection  with 
other  truck  crops  through  cooperative  organizations,  but  the  great 
bulk  of  the  crop  is  marketed  through  shipment  on  consignment, 
except  in  those  regions  where  extensive  canning  operations  are 
conducted.  Beans  for  canning  purposes  are  handled  much  the 
same  as  are  tomatoes  and  peas.  They  are  purchased  by  the 
canner  at  a  stipulated  price  per  unit  of  measure. 

Dried  beans  are  handled  in  much  the  same  manner  as  other 
grain  crops.  Local  dealers  who  are  provided  with  suitable  ware- 
house facilities  and  cleaners  usually  purchase  the  rough  beans  on 
a  clean-bean  basis  from  the  growers,  the  cleaning,  grading,  and 
distribution  being  entirely  out  of  the  hands  of  the  producer. 
The  bean  dealers  are  thoroughly  organized  and  in  close  touch 
with  the  distributing  markets.  Growers,  however,  have  up  to 
the  present  time  proceeded  on  the  basis  of  independent  action. 
There  is  no  doubt  that  cooperation  among  growers  would  result 
in  advantages,  particularly  in  the  sale  and  distribution  of  their 
crop.5 

8  U.  S.  Department  of  Agriculture,  Report  No.  98,  "Systems  of 
Marketing  Farm  Products  at  Trade  Centers, ' '  p.  33. 


TRADE  ORGANIZATION  73 

Broom  Corn 

Methods  of  Marketing. — In  the  small  area  in  Illinois  which 
produces  the  larger  part  of  the  standard  brush,  production  has 
continued  so  many  years  that  a  very  uniform  product  is  derived 
from  year  to  year  and  the  method  of  marketing  is  a  simple  sale 
to  buyers  for  the  large  factories  or  commission  firms.  In  the 
Southwest  buyers  are  stationed  regularly  in  the  larger  centers 
and  purchase  the  brush  from  the  wagons  as  it  is  hauled  into  the 
towns. 

It  is  the  practice  of  some  manufacturers  and  commission 
houses  to  contract  for  the  growing  of  certain  areas  at  a  certain 
price  per  ton.  This  practice,  however,  has  very  frequently  re- 
sulted in  the  breaking  of  a  contract  and  even  in  litigation.  It 
is  charged  by  the  contractors  that  the  growers  commonly  break 
their  contracts  when  the  market  advances  above  the  contract 
price  and  adhere  to  them  very  tenaciously  on  a  falling  market. 
On  the  other  hand,  the  growers  claim  that  in  the  event  of  a  crop 
of  poor  quality  they  are  unable  to  obtain  the  contract  price  from 
the  firms  with  whom  the  contracts  are  made.  There  are  as  yet 
few,  if  any,  local  organizations  of  broom  corn  growers  in  regions 
tributary  to  the  larger  producing  centers.  This  doubtless  will 
come  when  the  newer  producing  areas  have  been  longer  settled 
and  there  is  more  community  of  feeling  and  interest  among  the 
growers.  This  will  result  in  cooperative  purchase  of  expensive 
harvesting  and  cleaning  machinery  and  perhaps  in  cooperative 
drying  sheds.  It  may  result  also  in  the  employment  of  a  spe- 
cialist to  superintend  the  curing,  grading,  and  baling  of  the 
crop. 

Wichita,  Kansas,  is  probably  the  most  important  receiving 
and  distributing  point  for  broom  corn  in  the  whole  country. 
Here  are  located  enormous  warehouses  and  many  commission 
firms  with  buyers  covering  the  entire  territory  of  the  Southwest, 
while  Chicago,  St.  Louis,  Kansas  City,  and,  to  a  lesser  extent, 
Oklahoma  City,  are  also  important  centers  for  commission  han- 
dling of  the  brush.6 

"Ibid.,  p.  36. 


74  MARKETING 

Cheese,  Domestic  Swiss 

Most  of  the  domestic  Swiss  cheese  is  made  in  southern  Wis- 
consin. Factories  are  owned  and  controlled  by  companies  of 
farmers,  who  empower  the  cheese  maker  to  sell  the  cheese,  or 
have  a  committee  of  their  own  membership  to  do  the  selling.  The 
buyers  of  the  domestic  Swiss  cheese  are  located  in  the  small 
towns  convenient  to  the  producing  territory.  There  were  for- 
merly a  large  number  of  independent  buyers,  but  a  number  of 
these  have  recently  combined  to  form  one  large  company,  the 
combination  probably  being  made  to  eliminate  competition.  There 
are  still  a  few  independent  dealers,  one  or  two  of  which  are  doing 
a  very  large  business  covering  the  whole  producing  territory. 
Some  of  these  dealers  have  close  business  connection  with  large 
New  York  and  Chicago  houses. 

These  buyers  deal  directly  with  the  factory  salesmen,  usually 
buying  what  is  called  the  "run  of  the  shelf"  at  a  fixed  price. 
This  means  that  all  cheese  of  first,  second  and  third  quality  is 
taken  at  the  same  or  an  average  price.  The  buyer,  of  course, 
makes  a  close  inspection  of  the  cheese  on  the  shelf  before  making 
his  bid.  This  system  of  buying  has  the  same  evil  tendency  which 
creeps  into  all  systems  of  handling  dairy  products  in  not  paying 
a  premium  for  a  product  of  extra  good  quality. 

Swiss  cheese  is  held  in  the  cellar  or  curing  room  of  the  factory 
for  from  six  weeks  to  three  months,  where  it  goes  through  a 
ripening  or  curing  process.  Sales  are  at  infrequent  and  irregu- 
lar intervals.  The  committee  of  farmers  will  often  hold  the  con- 
tents of  their  curing  room  for  a  number  of  months  in  the  hope 
of  better  prices.  There  is  no  buying  or  selling  on  commission, 
the  buyer  always  paying  a  flat  price  and  buying  on  his  own 
account.  Cheese  bought,  as  a  rule,  is  delivered  by  the  factory 
to  the  warehouse  of  the  buyer,  where  it  remains  for  irregular 
intervals.  These  warehouses  are  equipped  with  refrigerating 
facilities.1 

'Ibid.,  p.  41. 


TRADE  ORGANIZATION  75 

Cotton  Seed 

The  peculiar  commercial  history  of  cotton  seed  has  no  doubt 
had  a  profound  influence  on  the  system  of  marketing  it  which 
has  grown  up  in  the  United  States.  Thirty  years  ago  some  of 
the  States  of  the  cotton  belt  were  still  enacting  penalty  legisla- 
tion to  regulate  the  disposal  farmers  made  of  their  seed,  which, 
scattered  on  the  public  dumps  and  thrown  into  streams,  con- 
stituted a  serious  menace  to  health.  As  late  as  1880  less  than 
7,000,000  gallons  of  oil  were  produced  in  the  United  States. 
Twenty  years  later,  in  1899,  93,000,000  gallons  were  made  and  in 
1909  the  production  reached  157,000,000  gallons.  In  1879  less 
than  $4,000,000  were  invested  in  the  industry  using  this  raw 
material,  while  by  1909  something  like  $91,000,000  capital  un- 
questionably found  profitable  investment  in  the  cotton-seed  and 
cotton-oil  industry.  Let  us  first  discuss  the  various  methods  by 
which  the  farmer  disposes  of  his  seed.  It  usually,  perhaps  in 
80  per  cent  of  cases,  passes  from  his  possession  at  the  gin.  Gin- 
ning in  the  United  States  is  usually  done  at  one  of  three  places 
— (1)  custom  gins,  (2)  oil-mill  gins,  (3)  privately-owned  plan- 
tation gins. 

The  commercial  ginner  charges  a  flat  rate  per  100  pounds  of 
lint  for  ginning,  usually  about  50  cents.  The  seed,  of  course, 
remains  the  property  of  the  farmer,  but  generally  custom  gin- 
ners  make  a  practice  of  buying  and  selling  both  cotton  and  cotton- 
seed, hence  in  a  very  large  percentage  of  cases  the  farmer  parts 
with  his  seed  to  the  ginner  and  for  a  flat  price  per  ton — the  price 
being  determined  chiefly  by  the  selling  arrangements  the  ginner 
has  been  able  to  make  with  the  oil  mill. 

At  the  present  moment  farmers  are  selling  seed  in  various 
parts  of  the  cotton  belt  at  prices  ranging  from  $14  to  $20  per 
ton.  This  diversity  in  price  is  not  logically  explainable  in  the 
great  majority  of  cases  on  the  basis  of  greater  cost  or  difference 
in  freight  rate.  In  other  words,  two  places  equally  distant  from 
an  oil  mill  with  practically  identical  feight  rates  may  be  $2,  $3, 
or  even  $4  apart  in  the  price  that  is  being  paid  the  farmer  for  his 
seed.  Indeed,  the  writer  is  familiar  with  primary  markets  where 
it  is  the  regular  practice  to  pay  the  large  plantation  owner  $16 


76  MARKETING 

per  ton  for  his  seed,  while  the  small  grower  and  the  tenant 
farmer  receive  only  $14  for  the  same  grade  of  seed  from  the 
same  buyer.  Likewise,  in  towns  where  both  ginneries  and  oil 
mills  are  located  very  often  the  ginner  pays  $15  per  ton  for  seed 
and  at  almost  no  added  expense  delivers  it  to  the  oil  mill  for 
$18  per  ton.  Nevertheless,  if  the  individual  farmer  brings  the 
seed  to  the  mill  himself  he  receives  only  the  same  price  that  he 
would  have  gotten  at  the  gin.  Local  merchants  to  some  extent 
also  buy  cotton  seed  and  accept  the  same  in  payment  of  store 
bills,  shipping  to  oil  mills  as  soon  as  they  have  car  lots. 

The  seed  from  plantation-owned  gins  is  sometimes  sold  by  the 
planter  direct  to  the  oil  mills  in  car  lots  when  a  freight  haul  is 
concerned,  but  more  frequently  it  is  sold  to  local  or  traveling 
buyers. 

There  has  been  developed  also  to  a  small  extent  on  large  plan- 
tations, especially  in  the  Mississippi  Delta,  the  plantation  oil 
mill.  These  are  usually  cold-process  oil  mills,  and  their  crude 
product  is  sold  direct  to  the  refineries.  In  fact,  it  is  believed  to 
be  impossible  for  the  private  individual  owning  a  small  oil  mill 
to  contract  to  have  his  own  crude  oil  refined  at  any  refinery 
in  the  United  States.  He  is  forced  to  sell.  The  profits  in  cot- 
tonseed-oil milling  are  undoubtedly  quite  ample,  judging  from  the 
lump  prices  that  are  paid,  the  diversity  in  price  between  various 
primary  markets,  and  the  readiness  of  capital  to  engage  in  the 
business.  There  is  real  need  for  a  disinterested  investigation  in 
the  marketing  of  cotton  seed  from  plantation  to  the  finished  oil 
product  ready  for  consumption.  The  beginnings  of  such  an  in- 
vestigation have  already  been  made  by  the  Office  of  Farmers' 
Cooperative  Cotton  Handling  and  Marketing,  of  the  Bureau  of 
Plant  Industry.  Considerable  information  has  been  gotten  to- 
gether and  contracts  have  been  established  with  several  oil  mills 
where  cooperative  work  will  be  taken  up  as  soon  as  additional 
funds  are  available. 

The  yield  of  oil  per  ton  of  seed  may  be  roughly  stated  as 
between  35  and  45  gallons,  though  yields  as  low  as  30  and  as 
high  as  50  are  recorded  each  season.  Variation  in  yield  depends 
on  seasonal  differences  and  variety  of  cotton  grown,  character 
of  weather,  maturing  time,  etc. 


TRADE  ORGANIZATION  77 

A  very  little  has  also  been  done  toward  cooperative  oil-mill 
building  and  operation,  the  members  of  the  cooperative  associa- 
tions contracting  to  deliver  all  their  seed  to  the  cooperatively 
owned  mill.  These  agreements  are  necessarily  ironclad,  as  the 
competing  oil-mill  buyers  would  soon  overbid  the  home  concern 
and  close  it  down  by  buying  up  its  supply  of  raw  material.  The 
particular  association  best  known  to  the  writer  paid  its  members 
$22.30  per  ton  for  seed  at  the  close  of  the  season  in  a  market 
that  was  only  given  $15.  One  frequently  meets,  in  traveling 
about  the  Cotton  Belt,  buyers  who  go  from  gin  to  gin  purchasing 
seed,  both  from  farmers  and  ginners  and  others,  and  shipping  the 
same  to  the  oil  mill  they  represent. 

Primary  markets  have  usually  little  competitive  buying  of 
cotton  seed;  the  price  is  usually  a  flat  price  and  all  buyers  pay 
pretty  much  the  same.  Farmers  in  certain  seasons,  especially 
this  year,  suffer  because  of  inadequate  supplies  of  freight  cars 
for  shipping  seed.  In  several  parts  of  Texas,  during  the  present 
season,  the  writer  found  farmers  compelled  to  haul  their  seed 
home,  a  number  of  miles,  because  buyers  would  not  take  it  through 
lack  of  shipping  facilities.  Very  few  industries  have  fewer 
middlemen  between  the  raw  and  finished  product  than  does  the 
cottonseed-oil  business.8 

Flaxseed 

The  production  of  flaxseed  is  confined  almost  entirely  to  the 
three  States  of  Minnesota,  North  Dakota,  and  South  Dakota. 
The  demand  for  this  grain  is  very  largely  from  the  linseed-oil 
mills,  though  small  quantities  are  used  for  other  purposes.  Con- 
signments on  commission  are  made  by  growers  of  flaxseed  in  car- 
load lots  and  shipped  direct  to  the  terminal  markets.  More  fre- 
quently, however,  grain  is  sold  to  local  buyers  for  delivery  to 
local  shipping  points.  These  buyers  may  be  independent  deal- 
ers, but  more  often  they  are  representatives  of  milling  companies 
with  large  interests  at  the  terminal  points.  The  principal  ter- 
minal for  flaxseed  shipments  is  Minneapolis.  Sales  of  flaxseed 
are  seldom  made  at  auction  either  in  the  region  where  it  is  pro- 

8  Ibid.,  p.  47. 


78  MARKETING 

duced  or  by  agents  or  dealers  in  the  large  cities.  This  crop  is 
not  ordinarily  sold  prior  to  harvest.  Sales  are  not  usually  made 
direct  to  the  consumers,  except  where  mills  are  located  in  the 
immediate  vicinity  where  the  crop  is  produced. 

At  a  considerable  number  of  towns  in  the  three  States  where 
flaxseed  is  most  largely  grown,  cooperative  elevator  associations 
have  been  organized.  These  associations  buy  the  seed  from  mem- 
bers and,  in  some  cases,  from  outsiders  as  well,  and  ship  to  ter- 
minal markets  where  the  seed  may  be  sold  direct  to  the  consumer, 
but  is  more  often  handled  through  a  commission  house.  These 
cooperative  elevators  usually  pay  market  price  and  return  profits 
from  their  transactions  to  the  members  in  the  form  of 
dividends.    .    .    . 

Flaxseed  is  seldom  sold  by  the  retailer  in  its  original  form, 
but,  as  already  stated,  is  used  almost  entirely  in  linseed  oil  and 
its  by-products.  The  linseed-oil  mills  purchase  the  seed  either 
direct  from  the  grower  through  local  representatives  in  the  region 
where  the  crop  is  grown,  or  from  dealers  at  the  terminal  markets. 
The  manner  of  handling  this  grain  by  commission  houses  is  not 
different  from  the  manner  in  which  corn,  wheat,  and  other  cereals 
are  handled.  The  principal  purchases  by  mills  and  factories  are 
made  during  the  two  or  three  months  following  harvest,  after 
which  time  the  seed  is  stored  in  local  or  terminal  elevators  until 
it  is  wanted  for  use.  The  items  of  expense  in  marketing  include 
transportation  from  the  farm  to  the  shipping  station,  maintenance 
and  running  expenses  of  local  elevators,  transportation  from 
shipping  stations  to  terminal  elevators  or  mills,  maintenance  of 
terminal  elevators,  and  commissions. 

Flaxseed  is  not  ordinarily  stored  by  the  producer  for  any  con- 
siderable length  of  time.  It  may  be  stored  for  a  few  days  or 
weeks  until  it  can  be  delivered  to  the  local  elevator,  or  in  occa- 
sional cases  it  may  be  stored  for  a  considerable  period  awaiting 
an  advance  in  price.  After  it  is  purchased  by  local  elevators  it  is 
quite  often  stored  for  a  considerable  period,  this  period  varying 
from  a  few  weeks  to  six  or  eight  months.9 

9  Rid.,  p.  49. 


TRADE  ORGANIZATION  79 

Flowers  and  Ornamental  Plants 

Cut  flowers  and  plants  are  generally  sold  direct  to  the  con- 
sumer or  to  the  retail  florist  by  the  grower,  and  only  surplus 
stock  that  cannot  be  disposed  of  otherwise  is  consigned  to  com- 
mission dealers.  A  grower,  however,  who  is  located  some  dis- 
tance from  a  large  city  is  compelled  to  dispose  of  his  stock 
through  a  commission  dealer.  In  such  cases  the  stock  is  shipped 
to  the  dealer  who  disposes  of  the  stock  to  the  best  advantage, 
charging  a  percentage  for  his  services  of  from  15  to  20  per  cent 
on  gross  receipts.  Should  the  commission  man  be  unable  to  dis- 
pose of  the  stock  the  grower  loses  the  entire  shipment,  in  addi- 
tion to  the  express  charges.    Bills  are  settled  monthly. 

Frequently  a  retail  florist  will  visit  the  growers'  greenhouses, 
and  if  his  plants  give  promise  of  yielding  good  flowers  he  will 
arrange  to  purchase  the  entire  crop  for  the  season,  the  length 
of  season  depending  entirely  upon  the  nature  of  the  flowers;  but 
it  would  generally  mean  the  winter  months,  from  October  to 
April. 

Nearly  all  flower  growers  dispose  of  most,  if  not  all,  of  their 
stock  by  selling  direct  to  the  consumer,  through  the  local  mar- 
kets or  by  having  stores  of  their  own. 

Flowers  and  plants  are  either  sold  direct  to  the  consumer,  sent 
to  commission  dealers,  or  through  local  florists'  exchanges.  There 
are  no  cooperative  selling  associations.  The  stock  handled  by 
commission  dealers  is  generally  sold  to  retail  florists  only  and 
not  to  the  consumer. 

Flowers  are  generally  graded  first,  second,  and  third,  depend- 
ing on  the  length  of  stem,  excellence  of  color,  and  size  of  flower. 
Grades  are  determined  by  mutual  agreement  among  the  florists  and 
growers.  No  hard-and-fast  rules  have  been  adopted  in  regard 
to  grading,  therefore  they  vary  materially  in  different  cities. 

Sales  of  flowers  and  flowering  plants  are  heaviest  through  the 
winter  months,  from  October  to  April,  and  are  specially  heavy 
at  all  holidays,  such  as  Thanksgiving,  Christmas,  and  Easter. 

Flowering  plants  and  cut  flowers  are,  as  pointed  out  above, 
generally  sold  direct  to  the  consumer.  Where  a  grower  is  so 
located  as  to  be  unable  to  dispose  of  his  stock  in  this  way,  he 


80  MARKETING 

ships  direct  to  a  commission  house  or  to  the  retail  florist.  If 
to  a  commission  house,  the  stock  is  then  sold  to  the  retail  florists 
for  what  it  will  bring  and  a  commission  charge  of  15  per  cent 
made  for  flowers  and  20  per  cent  for  plants  on  gross  receipts. 
All  accounts  are  settled  monthly. 

A  type  of  such  houses  would  be  a  large  retail  florist,  who 
either  grows  no  flowers  or  plants  or  has  to  make  large  purchases 
of  stock  during  the  season  to  help  out  his  own  supply.  In  such 
cases  the  grower  or  his  agent  generally  visits  the  store  of  the 
retailer  and  takes  orders  in  advance  for  stock  or  orders  are  sent 
by  mail  or  telephone  to  the  grower.  On  receipt  of  cut  flowers 
they  are  unpacked  and  placed  in  large  vases  containing  water, 
placed  in  a  refrigerator  or  cold-storage  room,  where  a  suitable 
temperature  can  be  maintained.  After  the  flowers  are  suffi- 
ciently developed  they  are  then  offered  for  sale.  There  is  no 
large  organization  required  to  handle  this  business,  except  clerks, 
decorators,  and  delivery  wagons. 

A  commission  house  which  deals  in  cut  flowers  is  fitted  with 
large  refrigerators  or  cold-storage  rooms,  in  which  to  place  the 
flowers  when  received  from  the  grower  in  order  to  keep  them  in 
good  condition  as  long  as  possible.  On  receipt  of  stock  from  the 
grower  he  is  credited  with  the  number  and  kind,  and  when  sold 
is  sent  a  memorandum  showing  the  total  gross  receipts  and  the 
commission  charged.  Accounts  are  settled  monthly  or  semi- 
monthly, as  desired. 

Many  commission  houses  have  branch  stores  in  other  cities  and 
can  reship  stock  to  such  places  where  a  shortage  occurs.  In 
dealing  with  cut  flowers,  however,  it  is  very  risky  to  reship, 
owing  to  their  extremely  perishable  nature.  In  fact,  the  perish- 
able nature  of  the  stock  is  such  that  it  cannot  be  shipped  long 
distances  and  arrive  in  condition  to  be  used  or  to  compete  with 
stock  grown  in  the  neighborhood.  The  ordinary  florist  flowers 
that  are  most  commonly  used  would  be  almost  worthless  if  in 
transit  more  than  two  days. 

Very  rarely  are  cut  flowers  or  flowering  plants  sold  at  auction. 

In  all  cities  having  public  markets  flowers  are  sold  by  many 
of  the  growers  from  their  own  stands  direct  to  the  consumer. 


TRADE  ORGANIZATION 


81 


Season  for  cut  flowers  and  flowering  plants  lasts  all  year,  but 
sales  are  heaviest  from  October  to  the  end  of  April.10 

69.  Typical  Organization  Charts. — The  following  dia- 
gram shows  the  trade  organization  that  has  developed  to 
handle  the  marketing  of  coal.    This  shows  that  there  is  not 


RAILROAD  COAL  COMPAN- 
IES 6THEIR  BRANCHES 


INDEPENDENT  COAL 
PRODUCERS 


CONSUMERS 


J 


MARKET  ORGANIZATION   CHART  FOR  BITUMINOUS  COAL 

a  very  complex  and  intricate  system  of  distributing  coal, 
as  in  the  ease  of  wheat.  No  doubt  this  is  one  factor  that 
will  make  the  Government  control  of  the  industry  from  the 
point  of  view  of  marketing  much  easier  than  otherwise. 
Also  it  must  he  stated  that  this  scheme  of  distribution  is 
the  one  that  existed  before  the  fall  of  1917.  Some  of  the 
changes  brought  about  and  some  of  the  new  problems  fac- 
ing these  middlemen  due  to  the  control  of  the  coal  industry 
by  the  United  States  Government  will  be  discussed  shortly. 
The  chart  on  page  82  shows  the  main  trade  routes  of 
pig  iron.  This  is  an  intermediate  stage  in  a  larger  process, 
but  it  reveals  this  section  clearly.  The  ore  starts  from  the 
mine  and  reaches  its  consumer,  the  foundryman,  by  one 
or  the  other  of  two  main  highways.    Considering  the  basic 


'Ibid.,   pp.   50-52. 


82 


MARKETING 


character  of  the  commodity,  the  simplicity  of  the  organiza- 
tion is  remarkable.    An  explanation  should  be  sought. 


IRON  ORE 


MERCHANT  Fi 


BLASTFURNACES 


COMMISSION  MEN 


CONVERTERS 


FOUNDRYMEN 

MARKET  ORGANIZATION    CHART  FOR  PIG   IRON 


Further  examples  of  typical  organization  charts,  for 
sugar  and  antimony,  are  given  below. 

70.  Flexibility  of  Trade  Organization. — It  has  been 
stated  that  no  trade  organization  is  fixed  or  stable  for  long. 
The  movement  in  recent  years  to  "eliminate  the  middle- 
man," i.e.,  to  combine  the  distributive  functions,  has  made 
material  modifications.  In  certain  cases  the  producers  have 
slipped  past  all  the  middlemen  and  sold  direct  to  the  con- 
sumers. This  is  illustrated  by  the  selling  of  eggs,  potatoes, 
and  other  vegetables  by  the  parcel  post.  Cooperative  so- 
cieties have  in  some  cases  taken  over  the  distributive  func- 
tions. The  Bureau  of  Markets  in  the  Department  of  Agri- 
culture has  devoted  its  major  efforts  toward  cooperative 
marketing.  "Wholesalers  and  jobbers  have  in  other  cases 
incorporated  the  productive  functions.  This  is  true  of 
^certain  canned-food  jobbers. 


TRADE  ORGANIZATION 


83 


No  trade  organization  can  remain  fixed.  There  are  too 
many  keen,  active  minds  in  business  seeking  eagerly  for 
better  methods.  Even  where  concentration  and  consolida- 
tion have  gone  far  toward  integrating  the  entire  produc- 
tive  and   distributive   process,  there  is  the   ever-present 


PRODUCER 


AGENT  OF  ONE.  OR  BOTH 


REFINER 


'   .'.BROKER       J 


J 


WHOLESALE -GROCER 
JOBBER    .' 


MAIL-ORDERS    i 
HOUSES 


PRESERVERS 


RETAILERS 


CONSUMER 


MARKET   ORGANIZATION    CHART   FOR   CANE    SUGAR 


potential  competition  that  may  quickly  beat  its  way  through 
a  more  effective  path  to  market.  Out  of  this  struggle  for 
more  efficient  distributive  methods  comes  business  progress. 
There  is  in  business,  nevertheless,  a  strong  conservative 
element.  Business  practice  soon  crystallizes  into  business 
tradition.  Remnants  still  remain  of  outgrown  methods. 
The  toning  up  which  the  mail-order  houses  and  the  chain 
stores  have  given  to  the  country  retail  trade  is  convincing 


84 


MARKETING 


evidence  that  stagnation  was  there.  This  upward  climb 
to  better  business  methods,  though  slow  and  painful,  is 
sure  and  relentless.  The  present  day  is  witnessing  the 
application  of  "big  business"  methods  to  the  distributive 
process,  just  as  they  were  applied  to  the  productive  process 


ANTIMONY  ORE 


BROKER  OR 
WAREHOUSEMAN 


USER 


MARKET   ORGANIZATION    CHART   FOR    ANTIMONY 


from  1898  to  1902.  What  far-reaching  effects  the  use  of 
the  recently  developed  trade  acceptance  may  have  cannot 
now  be  determined.  The  building  of  a  great  municipal 
warehouse,  as  at  New  Orleans,  equipped  with  modern  dock- 
ing facilities  and  a  municipally-owned  switch  track,  will 
affect  the  trade  organization  of  those  commodities  which 
pass  through  it.  Everywhere  in  the  trade  organization, 
there  is  this  conservatism  and  this  progressivism. 


TRADE  ORGANIZATION  85 

71.  Conclusion. — A  trade  organization  is,  then,  the 
mechanism,  or  device,  for  carrying  goods  to  market.  It  is 
made  up  of  middlemen  who  perform  certain  distributive 
functions,  operating  through  institutions.  These  distribu- 
tive functions  may  not,  in  certain  cases,  be  distinguishable, 
but  in  the  marketing  of  raw  materials  and  finished  products 
they  are  isolated  sufficiently  to  make  an  approach  to  a 
study  of  marketing  methods  and  problems  feasible  through 
them.  Each  commodity  may  have  its  own  individual  dis- 
tributive problems,  but  the  broad,  underlying  problems  are 
the  same  and  may  be  generalized.  The  existing  trade  organ- 
ization is  in  no  case  the  best  or  the  worst  possible  one. 
It  is  a  dynamic  thing,  changing  through  the  years,  ofttimes 
combining  and  recombining  the  functions,  but  always  seek- 
ing a  better  way. 

Suggestions  fob  Study 

The  student  should  write  a  descriptive  analysis  of  the 
trade  organization  for  his  selected  commodity.  There 
should  be  included  a  chart  of  this  organization  and  a  dis- 
cussion of  the  strategic  points  in  it.  The  following  are 
general  topics  for  suggested  study: 

1.  The  effect  of  the  character  of  the  commodity  and  the 
character  of  the  market  upon  the  trade  organization  of: 
(a)  wheat;  (b)  cotton;  (c)  livestock;  (d)  petroleum;  (e) 
wool;   (/)  iron  and  steel;   {g)   perishable  fruit. 

2.  Specialization   of  distributive   functions. 

3.  The  combination  of  distributive  functions. 

4.  The  combination  of  the  middlemen. 

5.  The  clash  of  interests  in  the  distributive  process. 

6.  The  changing  character  of  trade  organization. 

7.  Strategic  points  in  marketing. 

8.  Social  control  of  trade  organization. 


86  MARKETING 

Readings: 

Holmes,  G.  K.,  "Systems  of  Marketing  Farm  Products,  etc.," 

U.  S.  Department  of  Agriculture.     Report  No.  98. 
Weld,  Marketing  of  Farm  Products. 
Huebner,    Agricultural    Commerce. 
Westerfield,  The  Middleman  in  English  Business. 
Swift  &  Company,  "Marketing  Meat  Products." 
Cherington,  The  Wool  Industry,  Chap.  IV. 
Wright,  Wool  Growing  and  the  Tariff,  Chaps.  VII,  VIII. 


CHAPTER  V 

THE  MIDDLEMAN 

72.  Who  the  Middleman  Is. — A  middleman  is  one  who 
performs  some  kind  of  distributive  function.  ' '  Middlemen 
are  understood  to  include  the  series  of  traders  through 
whose  hands  commodities  pass  on  their  way  from  maker 
or  producer  to  the  consumer. ' ' *  It  is  often  true  that  a 
single  middleman  combines  within  himself  several  func- 
tions; a  wholesaler  may  do  some  retail  business,  a  retailer 
some  wholesale  business.  The  group  of  economic  functions 
involved  in  distribution  may  become  centered  in  a  single 
organization,  such  as  a  cooperative  society.  The  very  fact 
that  the  economic  process  is  a  continuous  one,  that  there 
are  no  clear  lines  of  division  between  the  actual  operation 
of  many  of  these  functions,  that  two  or  more  are  often  in 
progress  at  the  same  time,  tends  to  make  them  coalesce. 

There  is,  nevertheless,  a  sufficiently  clear  distinction  in 
the  popular  mind  between  producers,  middlemen,  and  con- 
sumers, so  that  certain  middlemen  may  be  discussed  in  con- 
nection with  their  services.  Something  will  be  said  here 
about:  (1)  the  development  of  middleman  functions; 
(2)  the  buyers  and  sellers  in  the  local  markets;  (3)  the 
buyers  and  sellers  in  the  wholesale  trade;  (4)  the  retail 
trade;  (5)  the  tendency  to  eliminate  the  middleman  by 
integration,  direct  selling,  cooperative  organization,  parcel 
post;  (6)  the  outstanding  problems  connected  with  the 
handling  of  raw  materials  and  finished  products.  The 
point  of  view  will  be  that  of  a  descriptive  analysis,  i.e.,  an 

1  Westerfield,  The  Middleman  in  English  Business,  p.  119 

87 


88  MARKETING 

attempt  through  a  brief  description  to  reach  certain  broad 
conclusions. 

73.  Development  of  Middleman  Functions. — American 
industrial  and  commercial  institutions  are  British  in  origin ; 
early  American  trade  and  industry  were  simply  British 
trade  and  industry  transplanted.  AYhat  American  business 
is  to-day  is  that  transplanted  British  industry  modified, 
developed,  elaborated  by  the  enterprise,  the  daring  and 
business  intelligence  of  American  business  men.  The  origin 
of  the  American  middleman  was,  therefore,  in  England. 

In  England,  the  middleman  developed  during  the  years 
1660  to  1760.  This  was  a  golden  age  in  British  business 
prior  to  the  marvelous  development  which  resulted  from 
the  Industrial  Revolution.  There  was  a  tremendous  in- 
crease in  production  and  in  trade,  domestic  and  foreign ; 
there  was  the  development  of  machine  industry ;  there  was 
a  breaking  up  and  an  isolating  of  economic  functions; 
there  was  a  growing  complexity  in  trade.  New  ways  to 
market  were  opened  up  and  commercial  areas  broadened. 
Roads  and  vehicles  were  improved.  Governmental  policy 
was  liberalized  and  some  encouragement  was  given  to  mer- 
chants. There  was  an  increase  in  population,  the  number 
of  inhabitants  increasing  in  England  and  Wales  from  five 
and  a  half  to  seven  millions  between  1660  and  1760.  This 
was  the  period  during  which  England  laid  the  foundation 
of  her  commercial  supremacy. 

To  this  period  of  change  has  been  attributed  the  rise  of 
the  middleman  in  English  commerce. 

It  is  believed  that  commerce  and  its  growth  are  inexplicable  if 
little  or  no  countenance  is  paid  to  this  active,  thinking,  construc- 
tive, organizing  class.  The  class  did  not  exist,  except  in  embryo,  in 
the  mediaeval  system  of  barter  market  Before  the  Industrial 
Revolution  an  orthodox  system  of  middlemen  had  been  an  estab- 
lished fact,  and  the  modern  integrated  business  is  just  now  be- 
ginning to  divest  itself,  in  some  parts,  of  its  hold.    It  is  important 


THE  MIDDLEMAN  89 

to  discover  what  were  the  activities  of  these  new  men,  what  were 
their  relations  to  each  other  and  to  the  producers  and  consumers, 
what  were  their  functions  in  commerce,  and  what  their  connections 
with  statesmen,  national  policy,  and  social  life.2 

The  so-called  middleman  is  the  merchant,  the  man  who 
stands  between  the  producer  and  the  consumer.  Considered 
for  long  as  unproductive,  the  middleman  won  for  himself 
the  recognition  of  doing  a  task  worth  while.  As  a  matter  of 
fact  he  has  performed  a  great  social  service.  It  is  to  his 
enterprise,  his  initiative,  his  daring  and  courage  that  Eng- 
lish wares  entered  foreign  markets  and  multiplied  in  the 
home  markets.  As  itinerant  peddler,  as  merchant  prince, 
as  specialized  salesmen  in  established  markets,  the  mer- 
chant class  reached  a  position  of  importance  where  the 
producing  class  was  almost  wholly  dependent  upon  it.  In 
questions  of  finance,  in  taking  risks,  in  developing  in- 
surance, in  finding  new  markets,  in  educating  the  con- 
sumers to  new  wants,  it  was  the  merchant  class  that  led  the 
way.  "Before  the  Industrial  Revolution  especially,  the 
hand  that  turned  the  wheel  of  commerce  was  not  the  pro- 
ducing craftsman  but  the  merchant  and  tradesman." 

The  middleman  had  a  struggle  to  justify  his  existence, 
for  every  change  in  business  organization  is  resisted.  It 
was  claimed  that  the  distributive  functions  were  being  and 
could  continue  to  be  performed  by  the  guilds  or  by  the 
church.  Besides,  it  was  said,  the  man  who  is  occupied 
merely  in  handling  goods,  in  distributing  "back  and  forth 
.  .  .  the  product  of  Husbandry  and  Manufacture"  is, 
like  money,  unproductive.  The  concept  of  time  and  place 
utilities  had  not  yet  arisen.  As  a  matter  of  fact,  it  was 
not  this  concept  that  secured  an  acceptance  of  the  middle- 
man, but  rather  the  development  of  the  "make  work" 
theory,  namely,  that  a  continued  subdivision  of  labor  made 

'Ibid.,  p.  124. 


90  MARKETING 

more  work  and  kept  more  people  busy,  by  which  means 
alone  a  nation  grew  in  wealth. 

Until  the  introduction  of  machinery  made  possible  large 
scale  production,  the  multiplication  of  small  producing 
units  and  the  extending  markets  multiplied  the  number  of 
middlemen.  More  and  more  this  group  of  intermediaries 
separated  the  producers  from  the  body  of  consumers.  ' '  The 
introduction  of  the  middleman  into  economic  life  had  a 
most  profound  influence  in  the  social  history  of  mankind. 
Instead  of  local  self-sufficiency  and  separation,  a  broad 
economic  interdependence  and  community  of  interests 
arose.  A  competitive  system  supplanted  the  mediaeval 
direct-exchange,  public-market,  fixed-and-just-price  sys- 
tem. Supplies  were  equalized  in  times  and  places,  and 
made  less  dependent  upon  the  accidents  of  weather.  Eco- 
nomic life  acquired  a  speculative  quality.  The  modern 
categories  of  economics  arose.    Business  was  born."3 

The  modern  commercial  organization  has  by  no  means 
shaken  off  the  power  of  the  middlemen.  They  have  con- 
tinued largely  because  they  perform  a  necessary  service, 
and  partly  because  of  the  inertia  of  business.  There  can 
be  no  question,  however,  but  that  they  would  long  since 
have  practically  disappeared,  if  they  were  not  really  func- 
tioning economically.  "A  profound  law  governs  the  proc- 
esses of  civilization.  The  law  is  that  the  civilized  man 
always  tends  to  minimize  the  variable  elements,  or  the  risks 
of  his  business,  and  to  depend  more  and  more  largely  upon 
the  use  of  clearly  defined  and  intelligible  means,  the  result 
of  his  own  observation  and  of  the  widening  experience  of 
the  race."* 

It  is  this  active  observation,  this  keen  interest  to  find 
the  most  direct  and  effective  method,  that  has  been  the  main- 
spring of  development.     Besides,  business  methods  have 

*ma.,  p.  130. 

4  C.  F.  Dole,  Atlantic  Monthly,  vol.  c,  pp.  813-818. 


THE  MIDDLEMAN  91 

always  been  put  to  a  relentless  test.  ' '  The  commercial  con- 
siderations limiting  specialization  are  much  more  numerous 
and  important  than  the  mechanical.  The  ultimate  appeal 
in  all  these  matters  is  to  the  arbitrament  of  competition. ' ' 5 

Middlemen,  like  economic  institutions,  rise  to  meet  a 
need.  In  general,  their  services  are  most  needed  in  a 
widely-dispersed  industry,  with  little  local  specialization, 
in  which  the  means  of  communication  and  transportation 
are  poor,  and  there  is  seasonal  activity.  Under  such  cir- 
cumstances there  are  small  lots  at  both  ends  of  the  process ; 
commodities  are  collected  from  many  small  sources  and  are 
distributed  to  many  small  consumers.  There  is  then  the 
anonymous  producer  and  the  anonymous  consumer.  The 
middlemen  monopolize  the  knowledge  of  supply  and  the 
knowledge  of  demand.  Risk  and  control  are  theirs.  And 
theirs,  too,  is  the  chance  to  capitalize  their  superior  knowl- 
edge of  supply  and  demand. 

The  development  of  commerce  and  trade  after  the 
break-up  of  the  manors  and  the  rise  of  the  towns,  by  means 
of  markets  and  fairs,  is  familiar  to  all  students  of  the  his- 
tory of  commerce.  The  two  principles  which  directed,  more 
or  less  consciously,  the  lines  of  development,  have  been 
stated  thus:  "That,  as  far  as  at  all  possible,  sales  must  be 
public  and  at  first  hand,  and  that  everything  which  can  be 
produced  within  the  town  itself  shall  be  produced  there."9 

This  principle  of  self-sufficiency  led  to  a  condition  where 
all  the  supplies  possible  for  the  town  market  were  drawn 
from  its  tributary  territory,  while  at  the  same  time,  ' '  town 
handicraft  [manufactured  goodsl  had  an  exclusive  right 
of  sale  on  the  market."  Thus,  it  came  about  that  "the 
territory  from  which  supplies  were  drawn  for  the  town 
market,  and  that  to  which  it  furnished  commodities,  was 

*  Engineering  Maqazime,  vol.  xx,  p.  709. 
•Biicher,  Industrial  Evolution,  p.  116. 


92  MARKETING 

identical."  The  city  dweller  and  the  peasant  thus  stood 
in  relationship  of  mutual  customers.7 

At  an  early  stage,  however,  the  "foreign  seller,"  from 
another  town,  found  a  market  for  his  products  when  there 
was  no  home  producer.  With  his  advent  the  town  markets 
began  to  overlap  and  market  competition  was  possible. 
The  distributive  system  thereupon  grew  more  complex 
and  intermediaries,  that  is,  middlemen,  multiplied.  "It 
was  the  duty  of  these  intermediaries  to  bring  buyer  and 
seller  together,  to  assist  in  fixing  price,  to  test  the  goods 
for  possible  defects,  to  select  for  the  purchaser  the  quantity 
he  had  bought,  and  to  see  to  its  proper  delivery."  8 

These  men  were  forbidden,  at  first,  to  trade  for  them- 
selves, as  is  true  to-day  on  the  Chicago  Board  of  Trade, 
but  it  was  probable  that  retailers  existed  from  a  very  early 
time,  such  as  grocers,  peddlers,  and  cloth  dealers.  What 
might  be  called  the  wholesale  trade  was  exclusively 
itinerant  and  market-  and  fair-trade. 

It  is  clear  to  see  that  this  was  the  basis  upon  which  our 
present  commercial  organization  was  founded.  In  the 
early  Colonial  days,  in  New  England,  the  subdivision  of 
distributive  function  had  not  gone  far.  Boston  had  its 
fairs  and  markets  and  the  state  by  law  established  certain 
marketing  periods.  There  was  the  period,  too,  of  the  tin 
peddler,  the  itinerant  shoemaker,  the  meat  peddler,  and 
those  who  carried  packs  of  various  commodities  from  farm- 
stead to  farmstead.  From  this  simple  system,  with  extend- 
ing markets,  there  has  grown  a  vast,  complex  structure  of 
distributive  machinery.9  • 

'Ibid.,  pp.  114-126. 

"Ibid.,  p.  126. 

9  For  historical  sketch  of  market  development,  see  Hobson,  Evolu- 
tion of  Modern  Capitalism,  Chap.  VI;  Smith,  Industrial  and  Com- 
mercial Geography,  pp.  850-876;  Sparling,  Business  Organization, 
Chap.   VIII;   Biicher,  Industrial  Evolution,  pp.   114;   Day,  History 


THE  MIDDLEMAN  93 

Probably  the  most  important  point  to  note  in  the  de- 
velopment of  middleman  functions  is  the  change  from  a 
personal  to  a  wholesale  market.  The  results  of  this  drift 
from  one  kind  of  marketing  to  another  were  profound: 
(1)  There  was  a  loss  of  personal  contact;  (2)  there  were 
then  anonymous  goods  on  the  market;  (3)  there  was  a 
shift  from  service  to  quality  and  price  in  selling;  and 
(4)  there  arose  competition  between  merchants. 

The  essential  features  of  the  American  distributive  sys- 
tem have  been  described  as  follows : 

1.  The  necessary  outgrowth  of  the  fundamental  division  of 
labor  between  town  and  country  in  our  national  development. 

2.  A  development  out  of  the  constantly  widening  distance  be- 
tween the  areas  of  surplus  production  and  the  centers  of  consump- 
tion arising  from  the  territorial  expansion  of  the  United  States. 

3.  The  distribution  of  the  excess  or  surplus  farm  products 
among  the  deficit  nations  of  the  earth — that  is,  the  distribution  of 
that  portion  not  required  for  domestic  consumption — involves  so 
many  elements  of  risk  to  capital  and  labor  as  to  make  this  world- 
wide service  to  society  a  distinctively  speculative  business,  of  an 
altogether  too  hazardous  character  for  producers  or  consumers 
to  render  without  subjecting  society  to  still  greater  risks  of  pro- 
viding a  regular  food  supply. 

4.  To  develop  a  new  division  of  labor — that  of  the  capitalist- 
speculator,  whose  function  it  is  to  relieve  both  producer  and  con- 
sumer of  the  hazards  of  distribution,  so  that  the  surplus  on  one 
portion  of  the  earth  may  regularly  be  supplied  to  the  deficient 
portion  at  such  a  price  as  will  in  the  long  run  a  little  more  than 
balance  the  gains  and  losses  of  this  species  of  commercial  enter- 
prise without  unduly  enhancing  the  cost  to  the  consumer  or  un- 
duly depressing  the  margin  of  profit  to  the  producer.10 

of  Commerce,  Chaps.  V,  VI;  Green,  Town  Life  in  15th  Century,  2 
vols.;  Traill,  Social  England,  vol.  i;  Weeden,  Economic  and  Social 
History  of  New  England,  2  vols. 

10Keport  of  Industrial  Commission,  1900,  vol.  vi,  p.  23. 


94  MARKETING 

Working  through  the  distributive  system  as  it  stands 
to-day,  complex  and  cumbersome  in  certain  instances, 
simple  and  direct  in  others,  a  series  of  middlemen  are 
carrying  the  raw  materials  and  foodstuffs  to  market.  It  is 
now  proposed  to  discuss  the  activities  of  these  intermediaries 
critically. 

74.  Buyers  and  Sellers  in  the  Local  Market. — If  the 
definition  of  a  local  market  depends  upon  its  geographical 
proximity  to  the  source  of  supply,  it  must  be  clearly  under- 
stood that  two  kinds  of  processes  are  at  work.  In  one 
case,  the  raw  materials  and  foodstuffs  enter  these  local 
markets  for  immediate  or  at  least  for  local  use.  In  the 
other  case  these  materials  are  on  the  first  leg  of  their 
journey  to  primary  and  terminal  markets.  In  both  cases 
the  purchaser  may  be  called  the  local  buyer. 

The  local  buyer  is  the  first,  or  original,  purchaser  from 
the  producer.  This  original  purchaser  may  be  the  agent 
of  an  outside  buyer  or  an  independent  dealer.  In  the 
former  capacity  he  is  beginning  the  process  of  concentrat- 
ing materials  into  large  lots;  in  the  latter  case,  he  may 
be  buying  for  the  local  market,  that  is,  he  may  be  a  local 
merchant,  or  he  may  be  acting  independently,  buying  on 
his  own  account  to  ship  to  the  wholesale  market.  He  may 
go  to  the  farm  to  buy,  as  is  frequently  true  in  the  case 
of  eggs,  or  to  the  orchard  or  to  cotton  plantation.  There 
may  be  a  survival  of  the  ancient  system  of  barter,  where 
the  producer  exchanges  butter,  eggs,  chickens,  wood,  cotton, 
railroad  ties,  or  other  commodities  for  merchandise.  In 
many  diverse  ways  the  first  sale  is  made,  and  raw  materials 
and  foodstuffs  start  on  their  way  to  the  consumer. 

It  has  been  said  of  the  marketing  of  the  products  of  the 
farm  that 

there  are  five  ways  in  which  a  farmer  may  market  his  products, 
as  follows: 


THE  MIDDLEMAN  95 

1.  By  direct  sale  to  consumer. 

(a)     By  going  direct  to  residences. 

(&)     Through  public  or  municipal  markets. 

(c)  By  parcel  post  or  express. 

(d)  To  local  manufacturers. 

2.  By  selling  to  local  stores. 

3.  By  shipping  direct  to  dealers  in  large  cities. 

4.  By  selling  to  a  local  buyer. 

5.  By  shipping  through  a  cooperative  association.11 

There  are  five  different  methods  of  handling  milk  in  the 
local  market.  First,  it  may  be  delivered  to  the  consumer 
by  the  dairyman-producer.  This  type  of  organization  is 
rather  typical  of  the  small  town  but  becomes  less  important 
with  the  increased  size.  In  this  case  there  are  no  middle- 
men. The  producer  and  consumer  meet.  Second,  the  milk 
may  be  shipped  from  the  farm  in  milk  cans  to  the  whole- 
sale dealer  within  the  city.  Third,  the  producer  may  sell 
the  milk  to  creameries  generally  located  in  small  towns  or 
in  the  country,  or  to  the  milk  stations.  This  type  of  organ- 
ization belongs  particularly  to  milk  substitutes  and  to 
the  manufacturer  of  cheese.  Fourth,  the  producer  may  sell 
the  milk  to  large  bottling  plants  in  the  cities.  In  this  type 
of  organization  the  milk  train  becomes  important,  with  all 
the  special  equipment  needed.  It  is  said  that  by  means 
of  the  milk  train  a  monopoly  was  secured  over  milk  in  the 
New  England  district.  Fifth,  the  producer  may  sell  the 
milk  to  country  bottling  plants.  This  is  in  reality  a  modi- 
fication of  number  four,  because  it  simply  means  that  the 
dealer  has  transplanted  the  pasteurization  and  bottling 
process  from  the  city  to  the  country. 

There  are  three  ways  of  marketing  bituminous  coal  in 
the  local  market.  First,  it  may  be  sold  direct  to  retailers, 
through  the  selling  department  or  outside  agents  of  the 
mine  operators.     Second,  it  may  be  sold  through  jobbers. 

11  Weld,  Marketing  Farm  Products,  p,  24. 


90  MARKETING 

Or,  third,  it  may  be  sold  to  the  ' '  wholesale  trestle  and  dock 
companies."  Between  80  and  90  per  cent  of  the  entire 
output  of  pig  iron  is  used  by  the  steel  plant  producing  it. 
The  rest  is  sold  by  merchant  furnaces  into  the  general 
market.  There  are  no  local  dealers  in  the  handling  of 
anthracite  coal  at  the  mines.  It  is  controlled  by  producers 
until  it  reaches  the  consumer  through  their  own  agents 
or  is  placed  in  the  hands  of  commission  agencies.  Sugar 
is  sold  on  plantations  to  refiners'  agents.  Salt  is  brought 
by  producers  from  the  mines  to  distributive  warehouses, 
to  be  sold  to  dealers.  Peanuts  are  sold  to  farmer  buyers, 
who  purchase  from  their  neighbors  in  lots  of  from  one 
bag  up  to  one  hundred,  or  to  the  agents  of  cleaners,  or  to 
local  warehouses  or  to  commission  men  or  brokers  in  the 
wholesale  market. 

Whatever  the  channel  of  trade,  and  the  methods  are 
very  diverse,  the  transaction  is  the  first  step  from  producer 
to  consumer.  "When  the  volume  of  trade  warrants  it,  the 
wholesale  dealer  or  manufacturer  is  likely  to  send  his  agents 
into  the  local  market.  When  control  of  supply  is  possible, 
the  producer  will  tend  to  control  the  commodities  until 
they  reach  the  wholesale  market  at  least.  But  the  kind  of 
buyers  and  the  character  of  the  transaction  will  be  adapted 
to  the  character  of  the  commodity  and  the  character  of  the 
market  for  it. 

75.  Buyers  and  Sellers  in  the  Wholesale  Trade. — The 
wholesaler  is  one.  who  handles  commodities  in  large  lots, 
say,  in  carload,  boatload,  or  truckload  lots.  By  himself  or 
through  his  agents  he  reaches  out  to  touch  the  producer; 
he  draws  from  many  small  sources  into  the  reservoir  of  his 
storehouse.  He  buys  in  small  lots  to  sell  in  large  lots.  In 
doing  so,  he  is  a  collector,  grader,  standardizer,  storer, 
packer.  In  this  process  he  is  also  a  risk  taker.  He  buys 
and  sells  upon  his  superior  knowledge  of  demand  and 
supply.    It  is  often  necessary  for  him  to  finance  the  trans- 


THE  MIDDLEMAN  97 

action  before  it  takes  place.  In  general,  he  must  have  a 
knowledge  of  the  commodity,  of  the  supply  and  demand; 
he  must  have  capital;  he  must  have  a  storehouse.  He  is 
the  buffer  between  production  and  consumption;  he  levels 
out  the  seasonal  supply  geographically  and  chronologically. 

On  the  basis  of  the  nature  of  sales  made  to  or  through 
them,  middlemen  in  the  wholesale  market  are  called  com- 
mission men,  brokers,  jobbers,  forwarders,  factors,  and  so 
forth.  These  types  are  by  no  means  distinct,  however.  A 
commission  merchant,  if  true  to  type,  never  owns  the  com- 
modities which  he  handles,  but  receives  a  certain  percent- 
age of  the  sale  price  for  his  services.  This  middleman 
was  more  prevalent  formerly  than  at  present,  especially 
in  the  marketing  of  perishable  farm  products.  The  broker, 
if  true  to  type,  handles  no  commodities  at  all  himself,  but 
acts  as  an  intermediary  between  buyer  and  seller,  charging 
a  fee  for  his  service.  The  jobber,  if  true  to  type,  buys 
goods  and  sells  goods  in  job  lots,  or  wholesale  lots.  The 
real  service  of  a  forwarder  is  to  collect  from  various  pro- 
ducers small  lots  until  he  accumulates  a  carload,  thus 
saving  in  transportation  rates.  He  gets  a  fee  for  his  serv- 
ices. In  foreign  trade  he  may  become  a  broker  in  space 
aboard  ship  or  in  the  car,  taking  his  fee  from  the  trans- 
portation company. 

The  commission  merchant  needs  the  equipment  required 
for  handling  the  commodities  in  which  he  deals.  This  may 
be  a  warehouse,  cold-storage  room,  coal  bins,  grain  ele- 
vators, and  so  forth.  He  must  also  establish  the  necessary 
connection  both  with  producers  or  local  dealers,  and  jobbers 
or  retailers.  He  must  be  capable  of  inspecting,  grading, 
judging  what  he  buys.  Nevertheless,  the  commission  mer- 
chant, as  such,  has  proved  himself  an  illogical  factor  in 
marketing.  He  has  controlled  the  goods  he  handled  with- 
out bearing  the  risk  for  them.  This  situation  has  given 
him   an   opportunity   for  dishonest   dealing,   which  some 


98  MARKETING 

did  not  have  the  strength  of  character  to  resist.  He  is  an 
example  of  a  middleman  who  must  demonstrate  his  neces- 
sary economic  service. 

Brokers  are  middlemen  who  deal  in  contracts.  They 
have  clients  who  give  them  orders  to  purchase  certain  goods. 
Their  stock  in  trade  is  a  superior  knowledge  of  sellers  and 
buyers.  As  a  type  they  are  most  familiar,  probably,  as 
dealers  in  stocks  and  bonds.  In  the  Chicago  wheat  pit 
they  predominate ;  in  the  canning  industry  there  are  many 
brokers.  Their  fundamental  function  is  to  act  as  sales 
agent  for  one  party  and  as  purchasing  agent  for  another. 
As  industries  increase  in  size,  it  becomes  profitable  for  each 
one  to  have  its  own  special  agent  to  perform  the  services 
of  the  broker.  In  a  highly  organized  open  market,  brokers 
still  have  a  definite  function  in  buying  for  and  in  selling  for 
a  distant  client.  Often  the  broker  takes  on  other  functions, 
buying  outright,  for  instance,  a  cargo  of  coffee  or  sugar  on 
the  sea  and  then  endeavoring  to  sell  it  before  it  reaches 
port.  Or  he  may  sell  on  commission.  It  is  easy  for  him 
to  slip  over  into  other  fields  if  he  has  the  equipment  to 
handle  the  goods.  The  broker  has  less  control  over  the 
commodity  than  the  commission  merchant  and  less  risk. 

The  jobber  has  been  a  most  potent  force  in  modern  busi- 
ness. As  a  general  type  he  has  been  alert,  aggressive,  pro- 
gressive. Most  frequently  he  has  developed  from  a  re- 
tailer, having  established  a  successful  business  and  made 
a  wide  acquaintance.  The  jobbers  in  foodstuffs  have  "a 
following  of  grocers,  butchers,  marketmen,  and  other  small 
dealers,  many  of  whose  orders  are  taken  in  advance  and 
later  delivered  throughout  the  city  to  the  purchasers. 
This  class  of  jobber  includes  many  firms  that  fill  orders 
for  country  towns.    The  order  trade  is  considerable." 12 

They  buy  outright  the  materials  they  handle,  and  grade, 

u  Kiely,  ' '  The  Middleman  in  Practice, ' '  Cyclopedia  of  Agriculture, 
p.  241. 


THE  MIDDLEMAN  99 

sort,  pack,  finance  them  and  break  them  up  into  small  lots 
or  assemble  them  into  large  lots.  They  must  be  equipped 
with  a  storehouse  and  facilities  for  handling  the  goods. 
Often  the  big  jobbers  become  producers  and  retailers  as 
well.  In  many  lines  of  business  they  have  proved  that 
they  do  their  service  more  economically  than  the  individual 
business  can  do  it.  The  individual  business  may  develop, 
however,  until  it  can  afford  to  incorporate  these  functions. 
"The  banker  is  the  middleman — the  jobber — of  the  money 
market. ' ' 

The  "factor"  is  a  transplanted  British  business  term 
and  is  applied  most  frequently  in  the  United  States  to  a 
middleman  in  the  handling  of  cotton.  "The  planter  may 
consign  to  a  factor,  with  instructions  to  hold  the  cotton 
for  higher  prices  and  then  sell  it  on  commission.  The 
factor  often  makes  an  advance  of  possibly  two-thirds  or 
three-fourths  the  value  of  the  cotton,  and  charges  the 
planter  interest  on  this  advance.  When  the  sale  is  made, 
the  factor  deducts  his  charges  from  the  amount  received 
and  remits  the  net  proceeds  to  the  planter. ' ' 13 

This  is  almost  an  anomalous  type,  but  is  most  nearly 
like  a  commission  merchant.  He  never  holds  title  to  the 
goods;  he  receives  them  only  on  consignment;  he  stores 
them ;  he  finances  the  producers.  He  sells,  like  the  broker, 
under  orders.  With  a  better  warehousing  system  and  more 
financial  independence  on  the  part  of  the  planter,  he  may 
tend  to  disappear. 

As  has  been  said,  distinction  either  of  functions  or  of 
types  in  the  wholesale  trade  is  not  clear.  A  middleman 
of  enterprise  and  with  shrewdness  can  make  a  place  for 
himself  even  against  the  general  tendency.  One  type 
of  dealer  is  peculiar  to  the  large  milk  markets.  This  is 
the  milk  broker.  He  performs  typical  broker  functions, 
either  finding  buyers  for  the  producers  or  finding  pro- 

13  Holmes,  Systems  of  Marketing  Farm  Products,  p.  42. 


100  MARKETING 

ducera  for  the  buyers.  This  work  is  carried  on  by  a 
single  man  or  more  usually  by  a  corporation.  This  broker, 
in  addition  merely  to  selling  contracts  for  the  delivery  of 
milk,  investigates  credit  conditions  and  guarantees  pay- 
ment. 

In  spite  of  the  wide  organization  in  the  iron  and  steel 
industry  there  are  pig-iron  commission  merchants.  In  the 
marketing  of  leather  the  most  important  middlemen  are 
the  jobber  and  the  finder.  The  branch  warehouse  per- 
forms the  functions  of  middlemen  in  distributing  salt.  The 
most  difficult  and  technical  function  for  middlemen  in 
handling  tea  is  the  blending.  Usually  the  tea  jobber  blends 
the  tea  for  his  customer.  Crushed  stone  may  be  handled 
in  carloads  by  the  small  country  elevator  man,  along  with 
lumber,  coal,  and  cement,  and  sold  to  local  buyers  by  the 
ton,  or  by  the  city  yard  agent  of  the  crushing  company. 
The  outstanding  factor  in  marketing  wool  is  the  wholesale 
wool  dealer. 

AH  business  institutions  are  affected  by  the  personality, 
aggressiveness,  and  originality  of  men.  Nevertheless, 
broadly  the  middlemen  types  and  functions  are  as  indicated 
above.    Broadly,  too,  the  principles  involved  are  as  follows : 

1.  The  justification  of  the  middleman  is  that  by  his  ac- 
tivities certain  economies  are  realized  and  savings  are  made 
equal  at  least  to  the  returns  which  he  receives. 

2.  The  proof  of  economical  distribution  is  to  be  found 
in  the  market  price.  If  that  price  is  increased  by  the  inter- 
vention of  middlemen,  there  is  evidence  that  they  are 
getting  more  returns  than  their  service  justifies.  In  theory 
the  test  is  that  many  eager  minds  are  seeking  the  most 
economical  method,  and  therefore  the  one  existing  at  any 
given  time  must  stand  the  test  of  active  and  potential 
competition. 

3.  The  increasing  complexity  of  the  distributive  organ- 


THE  MIDDLEMAN  101 

ization,  the  increased  number  of  intermediaries,  should  in 
reality  result  in  a  lowered  price,  better  qualities  of  goods, 
better  service,  that  is,  increased  time  and  place  values,  or 
else  the  heavy  machinery  is  an  incumbrance. 

4.  In  the  long  run  such  results  as  lowered  price,  a 
greater  diversity  of  goods,  better  quality  and  better  serv- 
ice, must  be  realized  or  the  middleman  will  be  eliminated 
from  trade. 

5.  The  middleman  finds  his  most  fruitful  field  of  en- 
deavor where  industry  is  widely  dispersed,  where  there  is 
small  unit  output,  where  the  means  of  communication  and 
of  transportation  are  poorly  organized,  and  where  produc- 
tion or  consumption  or  both  are  seasonal  in  character. 
Under  these  circumstances  the  middlemen  are  needed  to 
gather  goods  from  many  small  sources,  to  store  them  until 
there  is  a  demand  for  them,  to  transport  them  for  proper 
distribution  both  as  to  time  and  place  in  accordance  with 
his  superior  knowledge  of  consumer  demand. 

Because  these  conditions  were  fulfilled  by  the  merchants 
and  tradesmen  in  England,  this  class  grew  and  thrived  in 
spite  of  traditional  opposition.  They  proved  their  worth 
by  their  work.  That  some  abused  the  special  privileges 
that  were  granted  them  brought  considerable  condemnation 
unjustly  upon  the  entire  group.  Monopoly  of  trade  at  all 
times  will  almost  inevitably  lead  to  unfair  practices.  It  is 
to  be  remembered  that  foreign  trade  was  concentrated  in 
a  few  English  ports,  and  in  the  hands  of  a  few  merchants. 
A  port  is  the  neck  of  the  bottle  in  foreign  trade,  and  who- 
ever controls  the  facilities  and  privileges  of  trade  can 
impose  his  will  upon  that  trade  and  secure  to  himself 
exorbitant  profits.  Nevertheless,  it  remains  a  fact  that  the 
merchant  was  both  necessary  and  useful. 

76.  The  Retail  Trade. — The  merchant  has  had  a  long 
and  varied  career. 


102  MARKETING 

The  history  of  the  concept  attaching  to  the  word  "merchant" 
shows  that  the  merchant's  relations  to  the  organizations  of  busi- 
ness varied  in  the  several  economic  stages  in  the  evolution  of  com- 
merce. The  term  has  continued  in  use  while  its  concept  varied 
with  time  and  place.  .  .  .  The  merchant's  business  consisted  in 
four  branches:  (1)  buying  and  selling  for  himself,  or  for  others 
on  commission,  (2)  speculating  in  time  and  place  on  merchan- 
dise, (3)  dealing  in  money  and  credit,  and  (4)  insuring  goods 
and  ships  in  transit.  Originally  the  merchants — the  Merchant 
Adventurers — performed  all  four.  By  1760  the  merchant  might 
do  one,  two,  three,  or  four,  of  these  businesses  at  the  same  time, 
as  might  suit  his  interests.14 

Already  the  functions  of  the  distributors  were  becoming 
specialized  in  England.  There  was  a  fairly  clear  distinction 
made  between  the  wholesaler  and  the  retailer  in  domestic 
trade.  The  two  general  movements  of  goods,  namely,  the 
flow  from  their  source  towards  points  of  concentration  and 
the  flow  from  these  points  toward  the  consumers,  could  be 
marked  with  considerable  clearness.  A  group,  known 
variously  as  buyers,  jobbers,  carriers,  etc.,  performed  the 
service  of  collecting  and  concentrating  the  goods.  Those 
who  distributed  goods  to  the  consumers  were  shopkeepers, 
retailers,  factors,  etc.  As  is  true  to-day,  some  merchants 
performed  both  of  these  general  functions,  but  the  dis- 
tinction was  on  the  whole  fairly  distinguished. 

The  character  of  the  function  as  well  as  the  extent  of 
specialization  depended  then  as  now  upon  conditions  and 
opportunities  and  capacities.  A  merchant  had  to  adjust 
himself  to  his  environment.  If  the  volume  of  trade  was 
sufficient,  one  merchant  might  confine  himself  to  the  whole- 
sale business  alone.  Another  would  find  it  necessary  to  in- 
clude retailing.  A  third  might  be  a  retailer  only.  All 
merchants  sought  to  do  what  paid  them  best.  This  seeking 
for  profit  in  trade  led  to  a  considerable  complexity  in  the 

14  Westerfield,  op.  cit.,  p.  330. 


THE  MIDDLEMAN  103 

distributive  organization.  The  middlemen  were  no  longer 
a  homogeneous  type,  if  indeed  they  had  ever  been,  but  were 
groups  variously  employed.  Here  is  obviously  the  origin 
of  the  system  that  has  developed  in  the  United  States.  The 
prototype  of  the  vast  distributive  organization  of  our  own 
time,  the  progenitors  of  all  our  specialized  middlemen,  are 
to  be  found  in  the  English  system. 

In  the  United  States  the  retailer,  generally  called  the 
merchant,  has  been  expected  to  carry  the  goods  wanted, 
at  the  time  and  in  the  quantity  desired,  and  at  a  reason- 
able price.  When  conditions  were  primitive,  he  was  not 
supposed  to  carry  fresh  strawberries  in  wintertime,  but 
he  was  counted  upon  for  bacon,  tobacco,  sugar,  coffee,  salt, 
lard,  beans,  flour,  and  many  other  necessaries,  to  meet  the 
demands  of  the  community.  In  the  small  villages,  this 
retailer,  often  with  the  post  office  in  the  back  of  his  store, 
was  a  considerable  figure,  and  his  store  was  a  social  center. 
With  changing  conditions  he  has  had  to  meet  many  new 
and  difficult  problems — problems  with  which  he  was  poorly 
equipped  to  cope.  Too  frequently  he  was  a  farmer  of  scant 
means  and  less  business  capacity,  who  desired  to  lead  a  city 
life.    The  high  mortality  rate  is  the  result. 

With  the  marketing  of  raw  materials,  excepting  such 
things  as  coal,  wood,  oil,  the  retailer  has  had  little  to  do. 
The  mills  and  factories  usually  buy  in  wholesale  lots.  The 
retailing  of  foodstuffs  is  a  most  important  step  in  market- 
ing, but  in  these  latter  days  this  function  has  become  so 
intertwined  with  the  retailing  of  manufactured  goods  and 
the  rise  of  the  new  types  of  retailers  is  so  significant  that 
further  discussion  will  be  postponed. 

77.  Tendency  to  Eliminate  Middlemen. — It  must  be  re- 
membered that  the  middleman  tends  by  his  own  efficiency 
to  eliminate  himself,  by  organizing  the  market  and  by 
making  it  possible  to  slip  past  him.  There  is  also  a  con- 
stant tendency  for  middlemen  who  achieve  great  success 


104  MARKETING 

to  attach  new  functions.  So  retailers  perform  wholesale 
functions;  wholesalers  establish  retail  connections;  pro- 
ducers sell  direct  to  retailers  or  to  consumers. 

There  are  four  chief  ways  in  which  middlemen  tend  to 
be  eliminated: 

(a)  By  Integration. — This  is  true  where  the  producer 
absorbs  the  functions  of  the  distributor.  Salt  may  be  car- 
ried from  the  mine  to  the  retailer  or  sugar  from  the  planta- 
tion through  the  refinery  to  the  retailer,  under  one  manage- 
ment. A  ranchman  may  bring  his  own  stock  to  market 
and  sell  it  himself  to  the  packer.  The  steel  manufacturers 
may  reach  out  to  control  ore  mines,  coal  mines,  ships,  rail- 
roads, the  manufacture  of  pig  iron  and  of  steel.  The 
familiar  movement  toward  integration  tends  to  drive  out 
the  middleman  as  a  distinct  and  independent  type. 

(b)  By  Direct  Selling. — The  producer  may  sell  direct  to 
the  consumer.  This  is  often  the  case  with  truck  garden- 
ers, and  with  other  producers  for  a  local  market.  Fre- 
quently a  dairyman  will  work  up  a  milk  route  of  his  own 
in  the  nearby  town.  A  stockman  may  butcher  and  peddle 
the  meat  from  his  own  stock.  This  type  of  marketing  is 
most  likely  to  develop  in  the  local  market  or  where  there 
is  a  very  large  organization. 

(c)  By  Cooperative  Organization. — Cooperative  market- 
ing in  the  United  States  has  developed  most  successfully  in 
farm  products.  Among  the  best  known  plans  is  that  of  the 
California  Fruit  Growers  Exchange,  wherein  the  producers 
of  oranges  and  lemons  control  the  marketing  of  their  prod- 
ucts until  they  reach  the  retailer  or  jobber.  Many  functions 
of  the  middleman  are  thus  combined. 

(d)  By  Parcel  Post. — This  is  obviously  one  method  of 
direct  selling,  but  is  such  an  interesting  experiment  as  to 
deserve  separate  mention.  When  the  high  cost  of  living 
began  to  press  more  and  more  heavily  on  the  consumer, 
the  Government  undertook  the  experiment  of  developing  di- 


THE  MIDDLEMAN  105 

rect  contact  between  producer  and  consumer  by  means  of 
the  parcel  post.  There  was  issued  by  the  Chicago  post  office, 
for  example,  a  pamphlet  entitled,  "From  Farm  to  Table, 
via  Parcel  Post."  This  was  "compiled  and  issued  by  the 
Chicago  post  office  for  the  purpose  of  distribution,  in  the 
city  of  Chicago,  to  consumers  who  may  desire  to  purchase 
butter,  eggs,  and  general  produce  direct  from  the  farmer, 
dairyman,  or  poultry  raiser,  via  United  States  parcel  post. ' ' 
The  pamphlet  contained  a  list  of  producers  who  had  "sig- 
nified their  desire  to  be  listed." 

The  experiment  quickly  revealed  the  functions  that  had 
been  performed  by  middlmen.  There  was  the  function  of 
financing,  of  grading,  of  bearing  losses,  etc.  Business 
could  not  develop  at  long  range  before  confidence  between 
the  parties  was  established. 

78.  Outstanding  Problems. — It  has  already  been  in- 
dicated that  the  two  great,  fundamental  problems  connected 
with  the  distribution  of  raw  materials  and  foodstuffs  are 
risk  and  control.  If  control  be  divorced  from  risk,  there 
arises  an  economic  anomaly.  Commission  merchants  have 
suffered  from  this.  Brokers,  also,  have  been  able  to  do  busi- 
ness on  such  a  slight  basis  of  capital  that  men  of  low 
standards  have  crept  in.  Abuse  of  their  power  by  un- 
scrupulous men  has  left  a  blot  on  the  escutcheon  of  them  all. 

There  is  also  the  social  phase  of  the  distributive  prob- 
lem. By  organizing,  as  retailers,  jobbers,  brokers,  and 
commission  men  have  done,  it  may  be  possible  to  take  ad- 
vantage of  this  combined  power  to  secure  too  large  a  mar- 
gin of  profit :  it  may  be  posible  to  stifle  competition  and  to 
level  out  price. 

Suggestions  for  Study 

The  student  should  present  a  discussion  of  the  types  of 
middlemen  who  handle  the  commodity  which  he  is  inves- 


106  MARKETING 

tigating.     An   organization   chart   should    be   made   also. 
The  following  are  general  topics  suggested  for  study : 

1.  Nature  of  economic  functions. 

2.  Forces  tending  to  multiply  the  number  of  middlemen. 

3.  "Jobbers  are  essentially  speculators." 

4.  Functional  middlemen. 

5.  Effects  of  (a)  character  of  product,  (6)  character  of  pro- 
ducing1 region,  (c)  location  and  character  of  markets,  upon 
middlemen  functions  in  marketing  cotton,  wheat,  livestock, 
petroleum. 

6.  Make  an  organization  chart  to  show  lines  of  control  in 
marketing  the  above  products. 

7.  Describe  methods  of  sale  by  each  type  of  middleman. 

Readings  : 

Yearbook  of  the  Department  of  Agriculture,  1912,  pp.  443-6, 
"Improved  Methods  of  Handling  and  Marketing  Cotton." 

Huebner,  Agricultural  Commerce,  pp.  100-110,  122-131. 

Weld,  Marketing  Farm  Products,  Chaps.  II,  III,  IV,  V,  VI. 

Cherington,  The  Wool  Industry,  Chap.  IV. 

U.  S.  Department  of  Agriculture,  Report  No.  98,  "System  of 
Marketing  Farm  Products." 

Dondlinger,  Book  of  Wheat,  Chap.  XVII. 

Department  of  Commerce,  "Report  of  Commissioner  of  Cor- 
porations on  the  Beef  Industry." 

Department  of  Commerce,  "Report  of  Commissioner  of  Cor- 
porations on  the  Petroleum  Industry." 

Westerfield,  Rise  of  the  Middleman  in  English  Business. 

Kiely,  Cyclopedia  of  American  Agriculture,  vol.  iv,  p.  241. 

Crissy,  "The  Jobber's  Justification,"  Saturday  Evening  Post, 
November  1,  1913. 

Thompson,  Annals  of  the  American  Academy  of  Political  and 
Social  Science,  November,  1913,  pp.  57-68. 


CHAPTER  VI 


TRANSPORTATION 


79.  Transportation  as  a  Commercial  Problem. — ' '  Market 
competition,"  said  the  Interstate  Commerce  Commission  in 
one  of  its  decisions,  "is  only  an  euphemism  for  railway 
policy."  It  is  a  matter  of  vital  necessity  to  a  railroad  that 
the  industries  along  its  lines,  the  section  of  the  country  it 
serves,  and  the  markets  it  reaches  flourish.  Not  only  has 
civilization  followed  the  freight  car,  but  commerce  and  in- 
dustry also.  These  are  interdependent  activities;  the  rail- 
roads cannot  live  without  industry  and  commerce,  and  in- 
dustry and  commerce  would  shrink  to  dwarfish  propor- 
tions without  the  railroads  or  an  adequate  substitute. 

For  long-distance  hauls  made  necessary  by  broadened 
commercial  areas  the  transportation  function  becomes  more 
and  more  conspicuously  essential.  This  function  may  be 
performed  by  several  different  means.  There  are  water- 
ways both  inland  and  along  the  coast;  there  are  the 
relatively  short  hauls  to  the  nearby  market-place  on  dirt 
roads  by  wagon  or  truck;  there  are  the  more  primitive 
methods  of  carriage  by  packs  on  the  backs  of  men  or  beasts 
of  burden ;  there  are  electric  railways  for  light  traffic.  In 
the  transportation  in  this  country,  however,  the  steam 
railroads  are  the  predominant  factor.  The  great  bulk  of  raw 
materials  are  carried  by  them  from  the  mine,  the  forest  or 
the  farm  to  industrial  centers.  Semi-finished  and  finished 
products  are  carried  from  concentration  points  to  places 
of  final  consumption  or  of  further  fabrication.  The  in- 
dustrial centers  of  New  England,  the  cotton  growers  of  the 

107 


103  MARKETING 

South,  the  fruit  growers  of  the  West,  the  farmers  of  the 
Middle  West  and  Northwest  are  all  dependent  upon  rail- 
road transportation.1 

This  is  stating  in  concrete  terms  what  has  previously 
heen  shown  graphically.1  Transportation  is  a  pervasive  fac- 
tor, entering  into  every  process  of  every  industry  and  into 
every  process  of  distribution.  The  costs  of  transportation 
run  against  every  commodity  at  every  stage  of  its  progress. 
It  is  a  profound  commercial  problem. 

The  carrier  function  has  been  recognized  for  a  long  time. 
Only  comparatively  recently,  however,  have  the  economic 
problems  been  attacked  with  seriousness.  Many  of  them 
have  as  yet  been  dealt  with  only  cursorily,  such  for  exam- 
ple as  the  terminal  freight  charge  and  the  economic  loca- 
tion of  transportation  lines.  The  fact  is  that  transporta- 
tion problems  have  always  kept  ahead  of  those  attempting 
to  deal  with  them,  in  their  increasing  complexity  and  scope. 
Projected  highways  have  had  to  struggle  with  later  pro- 
jected canal  systems;  canal  systems  with  steam  railroads; 
steam  railroads  with  electric  trolley  lines,  motor  trucks, 
airplanes.    And  the  end  is  not  yet. 

The  carrier  creates  both  time  and  place  values.  For  the 
purpose  of  creating  place  values  most  effectively,  the  coun- 
try is  to-day  enmeshed  in  a  network  of  roads,  canals,  trolley 
lines,  and  steam  railway  lines,  and  ships  ply  in  the  coast- 
wise, river,  and  lake  water  routes.  Commission  houses  and 
forwarders,  engaged  in  foreign  trade,  undertake  to  carry 
goods  to  all  important  trade  centers,  and  "to  all  points 
beyond."  Through  the  development  of  a  worldwide  trans- 
portation system,  the  world  has  become  a  single  great  mar- 
ket for  certain  commodities. 

Charges  run  against  goods  from  the  moment  they  enter 
the  economic  process,  from  origin  to  consumption,  and  de- 

*See  page  3. 


TRANSPORTATION  109 

terioration  is  often  rapid.  The  time  element,  therefore, 
becomes  more  and  more  important.  Hence  the  develop- 
ment of  through  carload  shipments,  of  fast  freight  lines,  of 
quick  local  deliveries  by  trolley  or  truck.  And  that  most 
perishable  of  all  commodities,  market  information,  may 
find  a  speedy  means  of  transportation,  aside  from  the 
telegraph  and  the  telephone,  in  the  airplane.  The  slow 
and  sluggish  barge  may  bring  ore  leisurely  down  the  lakes ; 
cotton  may  be  able  to  spend  the  necessary  days  to  move 
coastwise  in  steamers  or  even  sailing  vessels,  and  coal  may 
spend  the  summer  reaching  its  destination  by  boat  and  slow 
freight.  This  is  true  only  because  the  ship  or  car  is  not 
alone  a  conveyance  but  also  a  warehouse;  these  goods  are 
being  stored  while  they  are  being  carried. 

It  has  been  estimated  recently  that  the  tonnage  on  the 
railroads  of  the  United  States  consists  mainly  of  bulk 
traffic.  Three-fourths  of  the  total  tonnage  is  made  up  of 
raw  materials  and  foodstuffs  in  a  proportion  about  as 
follows : 

Minerals     55.72  per  cent 

Forest  products   11.33  per  cent 

Agricultural  products  8.75  per  cent 

About  four-fifths  of  the  freight  in  the  United  States  is 
carried  in  bulk,  that  is,  in  carloads  or  trainloads. 

The  carriage  of  commodities  in  this  country  is  for  a 
relatively  long  distance.  Hence  there  are  large  cars  and 
long  trains.  Some  years  ago  the  standard  capacity  of  a 
freight  car  was  40,000  pounds ;  now  cars  of  this  size  make 
up  less  than  7  per  cent  of  the  total  number,  and  less  than 
4  per  cent  of  the  hauling  capacity.  These  estimates  are 
exclusive  of  privately-owned  cars.  Nearly  two-thirds  of 
the  freight  cars  are  to-day  from  60,000  to  80,000  pounds 
capacity.  About  12  per  cent  have  a  capacity  of  100,000 
pounds.    In  Europe  a  freight  car  of  40,000  pounds  capacity 


110  MARKETING 

is  among  the  largest;  a  "ten-ton  truck"  is  the  standard. 
In  England  coal,  iron  ore,  and  heavy  bulk  traffic  are  regu- 
larly carried  in  fifteen-  or  twenty-ton  "wagons" ;  in  France, 
the  "wagons"  that  would  carry  "8  chevaux"  or  "40 
homines"  are  a  familiar  sight.  The  average  freight  train 
load  in  the  United  States  is  about  352  tons,  at  least  three 
or  four  times  that  prevailing  in  Europe. 

The  transportation  system,  like  every  other  industrial 
and  commercial  system,  develops  and  adapts  itself  to  meet 
economic  needs.  Three  important  factors  that  have  helped 
to  determine  the  size  of  the  freight  car  and  the  size  of  the 
train  are  the  character  of  the  traffic,  the  length  of  the  haul, 
and  the  large-scale  business  of  the  country.  The  traffic 
in  raw  materials  and  foodstuffs  is  not  only  of  vast  amount 
but  also  of  a  greatly  varied  character;  grain,  cotton,  live- 
stock and  meats,  fruits,  nuts,  butter,  eggs,  poultry,  coal, 
ore,  oil  are  carried  in  thousands  of  carloads  for  hundreds 
and  thousands  of  miles. 

This  summary  gives  no  adequate  idea  of  the  actual  handling 
of  two  million  freight  cars  that  are  in  service  day  in  and  day 
out;  of  the  tens  of  thousands  of  freight  trains  that  are  moving 
by  day  and  by  night,  carrying  foodstuffs  to  markets,  materials 
to  mills  and  factories,  and  finished  products  to  warehouses  and 
retail  dealers.  This  is  the  function  of  the  railroad.  Upon  its 
successful  performance  depends  the  material  welfare  of  the 
country,  and  its  successful  performance  in  turn  rests  upon  the 
prompt  and  efficient  conduct  of  the  processes  of  agriculture,  of 
industry,  and  commerce.2 

80.  Transportation  to  Local  Market. — It  is  rare  indeed 
to  find  a  situation  where  there  is  no  haulage  from  source  of 
material  to  factory,  mill,  or  consumer.  The  farmer  must 
haul  his  crops  from  field  to  granary  or  to  the  local  market ; 
no  steel  mill  has  all  of  its  materials  at  hand ;  even  in  a  stone 

1  McPherson,  Railroad  Freight  Bates,  p.  13. 


TRANSPORTATION  111 

quarry  there  is  need  of  haulage  in  small  trucks  or  by  over- 
head wire.  It  may  be  said  that  there  is  a  transportation 
charge  of  some  sort  from  the  point  of  origin  until  the  com- 
modity in  its  finished  form  reaches  the  consumer. 

Usually  the  haul  to  a  local  market  is  made  by  a  local 
conveyance,  and  usually  the  producer's.  The  farm  wagon 
has  been  most  serviceable  in  this  kind  of  haulage,  although 
in  many  places  now  the  automobile  or  truck  is  displacing 
the  wagon.  One  company  in  central  Indiana  has  a  fleet 
of  twenty-five  trucks  for  hauling  poultry,  eggs,  and  butter. 
The  United  States  government,  through  officials  in  the  De- 
partment of  Agriculture,  made  some  investigations  ' '  to  de- 
termine the  feasibility  of  a  national  campaign  for  rural 
express  connecting  large  cities  with  nearby  producing  cen- 
ters." Cooperative  haulage  to  the  local  market,  as  for  in- 
stance among  dairymen,  has  made  possible  the  use  of  trucks. 
The  following  item  is  also  of  interest : 

In  Iowa,  one  hundred  and  thirty-three  miles  would  be  a  long 
distance  to  drive  hogs,  or  to  haul  them  in  a  horse-drawn  wagon, 
but  a  load  of  1,230  pounds  was  carried  from  Chariton  to  the 
packing  plant  in  Ottumwa,  bringing  the  top  price  because  they 
were  in  such  good  condition.  If  sold  at  the  local  market,  the 
price  would  have  been  lower,  local  dealers  would  have  taken  their 
profits,  shipped  by  rail  with  consequent  loss  in  weight,  and  the 
pork  chops  cost  more  when  sold  to  the  ultimate  buyer.3 

The  average  distance  from  plantation  to  local  shipping 
points  for  cotton  has  been  reckoned  at  from  seven  and 
nine-tenths  to  fifteen  miles.  The  average  load  was  a  frac- 
tion over  three  bales.  The  average  cost  per  hundred  pounds 
was  from  nine  to  twenty-three  cents ;  per  bale  about  eighty 
cents.  From  555  cotton  plantations  surveyed  to  their 
respective  local  shipping  points,  shipment  by  wagon  cost  on 
the  average  sixteen  cents  per  hundred  pounds. 

■  Timken  Magazine. 


112  MARKETING 

Generally  speaking,  the  initial  haulage  to  the  local  mar- 
ket is  clone  by  the  producer  and  by  his  own  conveyance. 
But  all  improvements  in  vehicles  not  only  widen  the  hori- 
zon of  life  for  the  producer  but  broaden  the  local  market 
as  well.  It  has  been  said  that  the  automobile  has  increased 
the  living  radius  of  the  farmer  by  fifty  miles;  the  local 
market  has  expanded  proportionately.  Usually,  too,  this 
item  of  cost  is  not  isolated. 

Some  comparative  cost  figures  were  made  in  1915  to  show 
the  relation  in  expense  of  local  haulage  by  horse  and  wagon 
and  by  truck. 

These  figures  show  that  it  costs  $4.72  per  day  to  operate  a 
one-horse  truck,  or  $127.02  a  month.  The  cost  of  up-keep  of 
a  two-horse  team  is  $7.44  per  day,  or  $202.04  per  month.  .  .  . 
A  horse  must  be  fed,  housed,  maintained,  and  cared  for  during 
365  days,  but  to  get  his  actual  earning  capacity  there  should 
be  a  deduction  of  fifty-two  Sundays  and  eight  holidays,  leaving 
305  effective  days.  A  horse's  up-keep  in  idleness  is  the  same 
as  in  times  of  actual  service.4 

The  struggle  for  competency  in  marketing  methods  be- 
gins thus  early,  and  extends  to  the  end  of  the  process.  The 
horse  displaced  the  human  carrier ;  the  truck  is  driving  out 
the  horse  and  later  may  likewise  yield  to  a  more  effective 
method. 

The  carrier's  functions,  even  at  this  early  stage,  however, 
are  not  simple.  "The  carrier's  function  is  not  a  single 
one  or  a  simple  one.  There  are  always  two  phases  to  his 
task:  he  must  transport  and  he  must  protect;  he  is  a  car- 
rier, he  is  a  bailee.  From  the  moment  he  receives  the  goods, 
he  is  a  warehouseman  until  he  delivers  them  to  the  re- 


ceiver 


"  5 


There  have  been,  and  there  are,  wasteful  and  inefficient 

*  Trade  Journal,  January,  1915. 

•Duncan,  "The  Uniform  Bill  of  Lading,"  Journal  of  Political 
Economy,  vol.  xxv,  p.  691. 


TRANSPORTATION  113 

methods  in  handling  as  well  as  in  hauling.  The  wastages 
in  handling  grain,  cotton,  coal,  fruit,  eggs,  and  countless 
more  commodities  in  this  initial  stage  are  well  known.  But 
the  producer,  as  a  carrier,  is  learning  to  perform  these  two 
functions,  of  transporting  and  of  protecting,  more  effec- 
tively because  he  is  learning  that  the  risk  is  his.  In  trans- 
porting to  the  local  market,  usually,  the  producer  controls, 
and  the  producer  bears  the  risk  for  his  products. 

81.  Transportation  to  the  Primary  Market. — On  the 
second  leg  of  the  journey  from  producer  to  consumer,  from 
the  local  market  to  the  primary  market,  the  dominant 
means  of  transportation  is  the  steam  railroad.  Primary 
markets  are  dependent  upon  railroads  for  their  very 
existence,  especially  those  inland.  It  is  in  the  transporta- 
tion between  these  markets  that  the  great  commodity  move- 
ments may  be  seen,  the  vast  ebb  and  flow  of  raw  materials 
and  foodstuffs,  and  the  "back  wash"  of  manufactured 
goods. 

The  functions  of  the  carriers  here  are  the  same,  although 
of  vaster  proportions,  as  those  at  the  earlier  stage.  The 
carrier  still  must  transport  and  protect.  Control  may  or 
may  not  have  passed  out  of  the  hands  of  the  producer  or 
local  buyer,  depending  upon  whether  or  not  he  has  re- 
tained the  right  to  divert  the  shipment  in  transit.  The  risk 
of  loss  from  mishandling  has  been  shifted  to  the  carrier. 
Risk  for  deterioration  and  for  market  fluctuation  attaches 
to  the  buyer  or  to  the  seller  according  to  the  nature  of  the 
sale. 

So  important  have  these  functions  of  the  carrier  be- 
come, so  vital  to  the  interest  of  so  many  people,  that  the 
railroads  are  no  longer  private  enterprises,  like  other  busi- 
nesses, but  quasi-public  enterprises,  that  is,  private  prop- 
erty devoted  to  public  service.  Populations  have  increased 
and  have  become  concentrated  in  large  cities  on  the  basis 
of  effective  transportation  facilities,  no  less  than  upon  the 


114  MARKETING 

basis  of  machine  production.  Transportation  has  been 
called  the  ''basis  of  civilization."  And  because  the  service 
performed  by  the  carriers  is  so  important,  railroad  com- 
panies have  been  compelled  to  take  their  full  share  of  re- 
sponsibility, and  to  submit  to  state  and  Federal  super- 
vision. 

Competition  in  transportation  to  the  primary  market 
is  of  three  different  kinds;  (1)  competition  of  routes,  (2) 
competition  in  facilities,  (3)  competition  of  markets.  The 
competition  of  routes  arises  wherever  "two  railways  are 
exposed  to  identical  commercial  conditions  both  at  the  point 
of  origin  and  destination. ' ' 6  This  happens  where  there 
are  parallel  railway  lines,  where  a  railway,  a  trolley,  a 
canal,  a  river,  or  even  a  dirt  road  afford  parallel  facilities. 
The  "West  Shore  Railroad  and  the  Nickel  Plate  route  were 
built  to  compete  in  this  way  with  the  New  York  Central 
Railroad  and  the  Lake  Shore  Railroad.  A  similar  situa- 
tion exists  between  Chicago  and  St.  Louis.  From  Colum- 
bus to  Cincinnati  one  may  see  not  only  a  rival  road,  but 
also  a  canal,  a  trolley  line,  and  a  dirt  road.  Such  a  situa- 
tion will  result  in  rate  competition. 

The  second  type  of  competition,  that  of  facilities,  is  one 
of  service.  ' '  Such  competition  is  confined  safely  to  rivalry 
for  business  at  the  established  rates."7  The  number  of 
trains  per  day  or  week,  the  speed  of  trains,  efficient  meth- 
ods of  handling,  are  all  parts  of  this  competition.  It  is 
a  healthy  sort  of  competition,  and  makes  for  continual  im- 
provements. 

The  third  type  is  competition  of  markets.  Not  only  does 
the  railroad  desire  to  keep  every  one  in  business,  but  also 
to  increase  business.  A  widening  market  may  mean  more 
overlapping  of  markets  and  that  manufacturers  and  mer- 
chants have  mOre  competitors.    Furthermore,  railroads  are 

8W.  Z.  Ripley,  Railroad  Rates  and  Regulation,  p.  114. 
T  Ibid.,  p.  116. 


TRANSPORTATION  115 

not  looking  for  any  one  kind  of  traffic,  but  a  satisfactory- 
sum  total.  There  are  direct  hauls  and  back  hauls;  there 
are  single  rates  and  combined  rates.  "The  point  to  carry- 
forward is  that  commercial  competition  demands  that  in 
every  case  not  single  rates  but  the  sums  of  all  the  connect- 
ing rates  for  each  competing  person  or  region  shall  be  prop- 
erly adjusted.  If  this  be  not  done,  some  one  will  be  ex- 
cluded from  the  market  and  put  out  of  business. ' ' 8 

These  three  types  of  competition  appear  in  their  most 
complex  forms  in  the  wholesale  trade.  Producing  centers, 
market  centers,  individual  business  interests,  railway  in- 
terests, are  all  involved.  If  a  flat  rate  is  given,  the  railroads 
can  maintain  a  parity  among  themselves  and  shift  the  ri- 
valry to  the  middlemen.  Often  this  is  not  consistent  with 
keeping  every  one  in  business.  If  Chicago  has  been  get- 
ting its  cement  from  down  state  or  from  Indiana,  should 
the  railroads  grant  to  a  steel  corporation  in  South  Chicago 
rates  to  match  its  proximity  to  the  market?  A  few  cents 
may  divert  wheat  from  Chicago  to  New  Orleans.  How  shall 
rates  on  lumber  be  adjusted  to  the  receding  line  of  timber 
supply? 

The  intricacy  of  freight  rate  adjustment  in  response  to  the  sub- 
tleties of  commercial  competition  depends  only  in  small  measure 
upon  the  absolute  freight  rate  imposed.  The  main  problem  is 
really  that  of  relativity.  But  this  does  not  mean  mere  relativity 
as  between  directly  competing  commodities  or  places.  A  strict 
relativity  based  upon  commercial  conditions  must  often  obtain 
as  well  between  the  rates  on  raw  materials  and  their  own  finished 
products;  between  all  the  various  by-products  in  an  industry; 
and,  of  course,  always  as  between  goods  capable  of  substitution 
one  for  another.9 

8  Ibid.,  p.  123. 

"Ibid.,  p.  134.  For  detailed  discussion  of  these  points  see  Ibid., 
pp.  114-46. 


116  MARKETING 

Transportation  by  water  has  always  been  a  potential,  if 
not  an  active,  factor  in  the  United  States.  The  railroad 
freight  rates  from  Chicago  to  New  York  or  to  New  Orleans, 
from  the  cotton-producing  regions  to  New  England,  from 
New  York  to  the  Pacific  coast,  are  all  affected  by  water 
carriage.  This  is  particularly  true  when  time  is  not  of 
the  essence,  and  place  values  dominate.  Ohio  has  a  heavy 
annual  tax  for  a  decrepit  canal  system.  The  Erie  Canal 
was  improved  during  the  war.  Iron  ore  came  by  water 
from  mines  in  Eastern  Tennessee  to  Chicago  during  the 
railroad  congestion.  The  agitation  of  a  deep-water  way 
from  Chicago  to  the  Gulf  and  to  the  Atlantic  will  not 
"down."  Nevertheless  Cincinnati  was  reduced  to  a  second- 
rate  trading  center  because  she  was  dependent  on  water 
transportation,  and  St.  Louis  had  to  await  the  develop- 
ment of  an  adequate  railway  system. 

The  water  route,  in  general,  is  cheaper  but  slower.  For 
low-grade  materials,  it  can  compete  with  railroads  and  may 
serve  certain  sections  not  well  equipped  with  other  car- 
riers. "Although  inland  water  rates  are  usually  lower 
than  rail  rates,  there  are  a  few  exceptions  to  this  rule.  Be- 
tween Hartford,  Connecticut,  and  New  York  City,  the 
rates  on  apples,  eggs,  hay,  and  potatoes  are  the  same  by 
rail  as  by  water,  although  the  water  route  is  52  miles 
longer  than  the  rail  route;  the  rates  per  hundred  pounds 
on  apples  and  eggs  are  higher  between  Charleston,  West 
Virginia,  and  Cincinnati  by  boat  than  by  rail."  10 

It  is  a  delicate  matter  to  tamper  with  rates  to  primary 
markets.  A  shift  of  a  few  cents  either  way  may  make  or 
mar  a  trade  center.  Transportation  is  an  artificial  eco- 
nomic factor  that  can  be  used  to  counteract  natural  dis- 
advantages for  a  considerable  period.     Many  industries 

10  Weld,  Marketing  Farm  Products,  p.  244.  For  full  discussion 
see  Andrews,  U.  S.  Department  of  Agriculture,  1914,  Bulletin  74, 
"Inland  Boat  Service." 


TRANSPORTATION  117 

have  been  kept  going  for  years  after  they  have  ceased  to  be 
economical,  by  a  transportation  rate.  From  this  aspect, 
too,  transportation  is  a  factor  of  great  commercial  impor- 
tance. 

82.  Transportation  to  Terminal  Markets. — There  are  no 
new  problems  raised  by  transportation  from  primary  to 
terminal  markets.  In  so  far  as  these  latter  markets  are  at 
the  seaboard,  carriage  by  water  is  of  increased  importance. 
On  these  points,  too,  there  is  usually  a  combined  ocean  and 
land  rate  to  a  foreign  port.  Cotton,  for  instance,  will  go 
from  any  southeastern  port  to  Liverpool  at  the  same  rate. 
All  the  Gulf  ports  are  likewise  on  the  same  basis.  Other- 
wise the  carriers  perform  the  same  functions  for,  and  are 
of  equal  importance  to,  the  terminal  markets  as  the  pri- 
mary markets. 

83.  Rate  Districts. — In  the  effort  to  make  transportation 
charges  that  are  fair  to  all  interested  parties,  there  have 
been  created  certain  rate  districts  or  regional  rate  struc- 
tures. These  regional  rate  structures  have  been  more  or 
less  empirically  determined ;  they  have  developed  without  a 
conscious  or  careful  preplanning.  The  principal  factors  in 
their  determination  have  been,  (1)  the  geographical  situa- 
tion of  the  region,  (2)  the  natural  material  resources,  (3) 
the  needs  of  the  people  and  the  industries,  (4)  the  general 
physiographical  relation  to  sources  of  supply  and  to  mar- 
kets, (5)  the  competitive  transportation  facilities,  (6)  and 
a  combination  of  all  of  these  factors  in  relation  to  all 
regions. 

The  fundamental  problem  of  a  transportation  system  is  to 
develop  a  region  economically.  Carriers  thrive,  if  at  all, 
upon  an  increasing  volume  of  business.  In  the  economic 
development  of  a  community  the  necessary  length  of  haul  is 
often  the  controlling  factor.  But  each  region  will  find  it 
necessary  to  adjust  its  own  rate  schedules  to  its  own  par- 


118 


TRANSPORTATION  119 

ticular  needs.    This  fact  is  illustrated  in  the  regional  rate 
structures  of  the  country. 

There  are  five  of  these  rate  districts  throughout  the  coun- 
try as  shown  by  the  accompanying  map.  Each  region  has 
its  own  peculiar  structure,  determined  by  the  factors  men- 
tioned above. 

84.  New  England  Bate  District. — The  chief  industrial 
and  commercial  factors  underlying  the  rate  structures  may 
be  described  as  follows:  the  mills  and  factories  of  New 
England  must  have  raw  materials,  coal,  wool,  cotton,  etc., 
and  the  manufactured  goods  must  be  able  to  compete  in 
the  markets  of  the  country,  if  every  one  is  to  stay  in  busi- 
ness. For  purchasing  raw  materials  and  for  selling  in 
"foreign"  markets,  the  manufacturers  of  this  district 
must  be  on  a  substantial  equality.  In  consequence,  the  ten- 
dency is  to  make  a  flat  rate  on  raw  materials  from  outside 
to  any  point  within  the  region,  and  to  give  practically  the 
same  rate  on  manufactured  goods  to  the  outside  market. 

This  system  tends  to  equalize  all  producers  within  the 
district  so  far  as  transportation  is  concerned,  and  to  throw 
the  burden  of  competition  back  upon  efficient  methods  of 
manufacturing  and  selling.  Charges  must  be  adapted  to 
meet  water  rates  and  will  inevitably  work  to  level  down 
advantageous  locations.  The  entire  district,  also,  must  be 
kept  in  business  as  compared  with  adjacent  districts. 

85.  Trunk  Line  and  Central  Traffic  District. — The  rate 
system  on  commodities  east  and  west  between  Chicago  and 
St.  Louis  and  the  Atlantic  ports  has  been  based  on  the 
great  trunk  lines  that  reached  out  from  New  York,  Balti- 
more, and  Philadelphia,  crossed  the  Appalachian  barrier, 
spread  in  a  web  through  the  fertile  region  beyond,  and  cen- 
tered first  in  Chicago  and  Cincinnati,  then  continued  to 
the  Mississippi  River.  The  rate  system  used  in  this  district 
is  known  as  the  "percentage  system"  in  which  the  rate 
from  Chicago  to  New  York,  as  modified  by  the  possible 


120  MARKETING 

water  route,  is  100  per  cent.  All  other  rates  are  certain 
percentages  of  this  rate.  Each  percentage  holds  for  all 
cities  and  towns  within  a  zone  extending  north  and  south. 
Cincinnati  is  87  per  cent;  St.  Louis  is  116  per  cent. 

This  is  considered  one  of  the  most  stable  rate  systems 
in  the  country,  and  it  has  been  said  that  a  great  number 
of  the  rates  will  be  definitely  established  from  this  basic 
rate.  It  may  be  seen  that  the  rate  presupposes  a  relatively 
stable  industrial  and  commercial  equilibrium.  A  great, 
sudden  change  might  disturb  the  basic  rates  and  demoralize 
the  entire  system. 

86.  Trans-Mississippi  and  Trans-Missouri  Rate  District. 
— The  railroad  web  spread  out  "fan-shape"  beyond  the 
Mississippi  and  Missouri  rivers.  Many  rising  towns  were 
clamoring  for  some  rate  advantage.  It  is  obvious  that  there 
is  here  no  base  line  for  a  basic  rate  as  between  New  York 
and  Chicago.  Industrial  and  commercial  conditions  were 
by  no  means  stabilized.  The  railroads  perforce  must  com- 
promise. The  result  is  a  system  of  "fixed  differences," 
under  which  certain  groups  of  cities  are  given  the  same 
rate  from  a  base  city. 

In  consequence  there  has  developed  a  "natural"  territory 
about  each  trade  center  where  wholesale  merchants  have  an 
advantage  in  respect  to  rates  on  freight.  At  the  same  time  a 
jobber  is  prevented  from  driving  his  competitor  in  another 
center  out  of  business.  The  freight  rates  tend,  therefore, 
to  keep  them  all  in  business  within  certain  bounds.  Each 
wholesaler  is  protected  in  his  own  bailiwick. 

87.  Southeast  Rate  District. — The  rate  structure  in  the 
"Old  South"  developed  long  after  the  chief  crop,  cotton, 
had  worn  a  channel  to  market.  As  quickly  as  possible,  it 
sought  a  water  course  or  a  port.  The  main  concentration 
points  were  therefore  connected  with  a  water  route.  Upon 
this  as  a  basis,  railroad  transportation  developed,  seeking 
first  to  join  the  interior  with  a  water  route.    As  a  result 


TRANSPORTATION  121 

there  arose  a  system  called  the  basing-point  system,  where 
a  rate  from  origin  to  a  basing  point  was  given,  and  then 
an  additional  charge  was  made  back  to  intervening  points 
and  on  to  nearby  points.  The  water  routes  are  still  effec- 
tive as  actual  and  potential  competitors.  A  flow  of  food 
and  feedstuffs  began  before  the  Civil  War  from  the  Middle 
West;  long  before  cotton  and  tobacco  had  been  carried 
North  and  abroad.  Household  utensils,  tinware  and  small 
hardware,  fish  and  bacon  made  a  partial  back-haul  from 
the  East  to  the  south. 

The  Civil  War  cut  across  inland  transportation  during 
the  period  1861-1865,  but  the  rate  structure  has  in  fact 
been  greatly  molded  by  these  channels  of  trade.  Con- 
centration points  for  cotton  will  show  this  fact.  "If  the 
basing  points  be  abolished  and  a  scale  of  rates  fixed  that 
uniformly  increase  with  distance,  the  source  of  supplies 
will  be  driven  back  to  the  source  of  production.  The  retail 
dealer  will  no  longer  be  able  to  keep  as  great  a  variety  of 
merchandise  on  the  same  capital,  and  as  he  will  not  be  able 
to  so  promptly  replenish  his  stock,  it  will  no  longer  be 
fresh."11 

88.  Texas  Rate  District. — The  State  of  Texas  has  tried 
to  build  up  a  rate  system  all  its  own.  The  idea  underlying 
it  is  that  the  State  should  not  have  one  or  two  large  dis- 
tributing centers,  but  many  small  ones  scattered  throughout 
the  region,  each  serving  its  natural  territory.  The  Rail- 
road Commission  of  the  State  sets  a  maximum  rate  that  is 
to  be  charged  for  intrastate  traffic.  Each  trade  center  can 
have  its  freight  carried  for  a  rate  increasing  with  the  dis- 
tance away  until  it  reaches  the  maximum,  and  then  the 
same  rate  must  be  charged  to  all  points  beyond.  This  gives 
each  town  an  advantage  in  the  territory  immediately  sur- 
rounding it,  with  a  "no  man's  land"  farther  out.  The 
system  is  intensely  selfish  and  short-sighted,  for  no  state 

"McPherson,  op.  cit.,  p.  89. 


122  MARKETING 

can  live  to  itself  alone.  It  is  called  the  common-point  sys- 
tem, because  from  outside,  say,  from  St.  Louis,  freight  pays 
the  same  rate  to  every  place  in  the  common-point  terri- 
tory. All  trading  centers  within  the  territory  have,  there- 
fore, an  equal  opportunity  so  far  as  freight  rates  are  con- 
cerned to  become  the  jobbing  center.  A  glance  at  the  map 
will  show  the  effect  of  the  system. 

89.  Pacific  Coast  and  Transcontinental. — The  principle 
on  which  rates  to  and  from  the  Pacific  Coast  have  been  made 
is  thus  stated  by  McPherson : 12  "  The  problem  of  the  rail- 
roads serving  the  Pacific  Coast  is,  therefore,  to  provide  that 
adjustment  of  outbound  rates  which  will  stimulate  the  con- 
sumption of  her  products,  and  of  inbound  rates  that  will 
bring  to  her  people  the  commodities  which  they  require 
without  undue  enhancement  of  the  price. ' '  Many  factors  en- 
ter here,  such  as,  water  routes,  Canadian  roads,  competi- 
tion between  the  East  and  the  Middle  "West.  Rates  are 
' '  blanketed ' '  back  from  the  coast  to  meet  water  rates ;  they 
tend  toward  a  postage-stamp  rate  from  Chicago  eastward 
to  keep  an  equilibrium.  When  traffic  comes  eastward,  it  is 
found  that  oranges  have  a  rate  of  $1.15  per  100  pounds 
from  the  packing  houses  of  California  to  every  point  east 
of  Denver,  and  lemons  are  fifteen  cents  per  100  pounds  less 
to  meet  the  competition  from  Sicily. 

90.  Classification  Rates. — On  the  basis  of  these  rate  dis- 
tricts commodities  are  classified  by  qualified  and  authorized 
associations.  The  same  rate  applies  to  all  commodities  of 
a  given  class.  Thus,  the  rate  fixing  is  greatly  simplified 
and  there  is  a  commendable  tendency  toward  standardi- 
zation. It  is  a  long,  slow  process,  however,  to  secure  uni- 
formity of  action  even  in  regard  to  bills  of  lading  where 
uniformity  is  so  obviously  desirable.  There  are  the  Official 
Classification,    the    Southern    Classification,    the   "Western 

M  Ibid.,  p.  104. 


TRANSPORTATION  123 

Classification,  and  the  Transcontinental  Classification  sys- 
tems. 

With  widened  markets  there  is  more  and  more  traffic 
between  these  rate  districts.  These  boundaries  are  there- 
fore of  less  and  less  significance.  Broader  forces  are  at 
work  upon  the  rates  than  those  within  the  region.  These 
forces  are  national  or  even  international  in  character. 
The  qualities  of  a  commodity  that  affect  transportation  in 
one  section  will  similarly  affect  it  in  another.  If  the  same 
rate  principle  is  applied  there  is  a  tendency  toward  a 
leveling  out.  The  movement  for  uniform  classification 
has,  however,  always  met  with  obstacles.  In  this  opposition 
business  tradition  has  been  a  strong  factor. 

91.  Commodity  Rates. — The  four  classifications  indicated 
above  will  take  care  of  21,700  or  more  articles.  Their  pur- 
pose, as  stated,  is  simplicity.  In  1896  there  were  131,597 
different  schedules;  in  1911,  there  were  93,821.  But  many 
commodities  are  taken  out  of  classes  and  given  special 
rates.  The  reasons  for  these  commodity  rates  are:  (1)  a 
recognition  of  market  competition;  (2)  the  result  of  the 
efforts  of  some  particular  lines  to  secure  advantage  for  some 
particular  shipping  point;  (3)  continuance  of  special  rates 
which  were  formerly  received  in  the  way  of  rebates;  (4)  to 
assist  particular  industries  in  marketing  products;  (5)  co- 
operation in  building  up  a  new  industry;  (6)  influence  of 
large  shippers  in  routing  traffic;  (7)  to  provide  combina- 
tions not  found  in  classes;  (8)  large  shipments  for  long 
distances;  (9)  for  commodities  of  low  grade  such  as  sand, 
gravel,  paving  blocks,  cement,  crushed  stone;  (10)  special 
market  conditions. 

The  principle  of  commodity  rates  has  been  stated  by 
Professor  Ripley  as  follows :  "No  single  tariff  is  applicable 
to  any  large  number  of  commodities.  Each  one  must  be 
regarded  as  a  law  unto  itself.  Not  only  does  the  ultimate 
amount  which  each  is  able  to  bear  depend  upon  the  value 


124  MARKETING 

of  that  commodity  but  also  the  conditions  determining 
competition  with  respect  to  it  must  be  different  all  along 
the  line." 

Commodity  rates  are  illustrated  by  the  great  staples  of 
the  country,  such  as  grain,  cotton,  coal,  wool.  In  regard 
to  these  commodities  the  following  cases  appear: 

1.  Commodities  which  have  widely-extended  productive 
areas  and  widely-extended  consumptive  areas.  The  situa- 
tion is  illustrated  by  grain,  grain  products,  livestock,  and 
dressed  meats.  Rate  solution  here  has  come  through  an 
equalization  by  way  of  different  gateways,  i.e.,  primary 
markets.  The  aim  of  such  rate  making  is  to  keep  all  ag- 
gregates the  same  from  the  entire  region  of  production. 

2.  Commodities  with  a  widely-extended  area  of  produc- 
tion with  converging  lines  of  transportation  to  places  of 
final  manufacture,  which  are  few  in  number,  and  are  con- 
fined in  area.  Illustrations  of  this  situation  are  wool  and 
bullion.  The  rate  solution  here  is  to  maintain  an  equilib- 
rium between  places  of  production  within  the  whole  area  of 
production. 

3.  Commodities  with  widely  divergent  sources  of  supply 
and  common  markets,  such  as  fruit  and  vegetables  from 
the  West  and  South,  destined  for  markets  in  New  York, 
Chicago,  and  New  England.  Rate  solution  here  is  an 
equalization  of  charge,  regardless  of  distance. 

4.  Commodities  with  one  limited  source  of  production 
and  a  far-flung  market,  such  as  petroleum,  ore,  Sea-Island 
cotton.  The  competition  here  is  on  substitute  commodities ; 
the  price,  including  freight  to  all  points,  is  thus  limited. 

Fully  75  per  cent  of  traffic  in  the  United  States  is  carried 
on  commodity  rates.  The  tendency  should  be  for  business 
to  become  more  and  more  stabilized,  and  for  more  and  more 
commodities  to  fall  into  classes.  A  more  scientific  and 
thoroughgoing  classification  would  greatly  help. 

92.  Terminal  Charges. — The  charges  against  commodities 


TRANSPORTATION  125 

within  the  market  centers  are  out  of  all  proportion  to  rail- 
road charges.  It  has  been  said  that  terminal  costs  absorb 
about  80  per  cent  of  the  total  rate.  Switching  cost  in  Chi- 
cago has  equalled  and  sometimes  exceeded  the  total  amount 
which  the  railroad  received  for  carrying  freight.  The 
handling  in  Chicago  of  goods  in  less  than  carload  lots 
from  Pittsburgh  to  Milwaukee  has  cost  more  than  the  entire 
freight.  This  situation  has  resulted  from  the  fact  that 
railroad  rates  have  not  taken  into  account  the  increasing 
terminal  costs  and  charges. 

Delivery  and  transfer  charges  are  relatively  high  every- 
where. It  was  estimated  during  the  war  by  the  Commer- 
cial Economy  Board  that  100,000  men  and  millions  of  dol- 
lars in  equipment  could  be  used  for  war  service,  if  delivery 
was  cut  to  one  per  day. 

Secretary  Redfield  has  estimated  that  the  factors  of  distribu- 
tion represented  by  the  word  cartage  are  more  costly  than  the 
total  railway  freight  rates  of  the  country  involved.  Take  a 
typical  example:  Pour  glass  tumblers  at  four  cents  each  were 
packed  in  excelsior  and  delivered  in  a  basket  worth  50  cents. 
The  driver  made  a  second  trip  to  get  the  basket.  Thus  the  cost 
of  packing  and  delivering  cost  the  store  far  more  than  the  value 
of  the  goods,  which  could  have  been  carried  home  by  the  cus- 
tomer. .  .  .  Deliveries  by  retail  stores,  which  average  a  cost  of 
about  3  per  cent  of  net  sales,  should  be  reduced  to  one  a  day.13 

"Where  freight  stations  are  not  centralized  or  economi- 
cally located,  where  the  drayage  business  is  closely  organ- 
ized, the  expense  of  terminals  is  heavy.  It  is  an  absurdity 
that  commodities  can  be  carried  hundreds  of  miles  at  a 
less  charge  than  is  required  to  get  them  from  the  freight 
house  to  their  local  destination. 

93.  Special  Cars. — To  meet  the  needs  of  transportation, 
various  kinds  of  special  cars  have  been  built.     In  1913, 

13  New  York  Times,  January  22,  1917. 


126  MARKETING 

there  were  2,445,508  cars  of  all  kinds.  Of  these  51,700 
wore  passenger  service  cars,  2,273,564  were  freight  cars. 
The  type  of  car  capable  of  most  all-round  service  is  the 
box  car,  of  which  there  were  1,032,737  in  1913.  The  flat 
cars  numbered  147,604. 

The  real  problem  in  this  connection  has  arisen  in  regard 
to  special  types,  or  limited-service  cars.  There  are  stock 
cars,  coal  cars,  tank  cars,  refrigerator  cars,  and  express 
cars.  There  were,  in  1913,  78,308  stock  cars,  871,379  coal 
cars,  8,216  tank  cars,  43,389  refrigerator  cars,  and  12,943 
baggage,  express,  and  postal  cars.  Special,  or  limited-serv- 
ice, cars  have  been  built  by  private  companies  more  exten- 
sively in  some  lines  than  by  the  railroads.  The  refrigera- 
tor car  is  an  example.  So  strategic  and  revolutionary  was 
this  type  of  car  in  the  meat-packing  industry  and  later  in 
the  carrying  of  fruits,  melons,  and  vegetables,  that  private 
control  of  them  gave  an  undue  advantage  in  competition. 

The  problem  of  private  or  divided  control  of  special  cars 
in  this  country,  as  is  true  of  all  freight  cars  in  England,  is 
not  yet  settled.  The  railroad  companies  have  claimed  that 
they  could  not  afford  this  extra  equipment  since  it  was 
not  possible  to  utilize  it  all  the  year  around  on  each  system. 
To  make  these  cars  pay,  it  was  said,  they  must  be  shifted 
from  one  part  of  the  country  to  another,  like  shock  troops, 
to  meet  the  seasonal  crop  emergencies.  An  independent 
ownership  might  accomplish  this ;  a  single  railroad  cannot. 
A  central  car  association  has,  therefore,  been  proposed. 
"What  happens  in  this  regard  is  of  extreme  importance  to 
merchants  and  manufacturers. 

94.  Car  Supply  and  Routing. — The  efficiency  of  freight 
railway  service  is  tested  by  its  ability  to  meet  the  demands 
in  every  part  of  the  country  when  they  arise.  There  are 
seasonal  demands  and  emergency  demands  to  be  met.  The 
orange  and  the  lemon  crop  in  the  "West  and  South;  the 
melon  crop  in  Indiana,  Colorado,  and  the  South ;  the  wheat 


TRANSPORTATION  127 

crop ;  the  shipment  of  cattle,  coal,  cotton,  corn,  from  source 
to  market ;  the  tons  of  ore ;  the  great  flood  of  manufactured 
goods — all  must  be  cared  for  with  justice  to  all  producers 
and  all  consumers.  The  equipment  must  be  able  to  carry 
the  peak  of  the  load.  Inevitably  there  will  be  idle  cars 
here  and  there ;  some  caught  in  an  eddy  of  the  trade  flow, 
some  waiting  for  the  seasonal  demand.  There  must  be  a 
reserve. 

Between  July  6  and  December  26,  1919,  76  per  cent  of 
the  entire  wheat  crop  was  moved  from  the  farms;  in 
amount,  645,318,000  bushels.  This  is  a  tremendous  drain 
on  the  freight-ear  supply,  when  there  is  a  demand  for  the 
movement  of  many  other  things  at  the  same  time.  The 
strawberry  crop  may  become  ripe  suddenly ;  the  cantaloupes 
may  be  ready  to  pour  out  in  a  great  flood.  These  things 
will  not  wait  without  loss.  Freight  cars  must  be  at  hand 
to  carry  them.  To  meet  these  ever  recurring  and  insistent 
seasonal  demands  the  cars  must  be  so  routed  as  to  converge 
at  the  proper  spots.  For  this  purpose,  government  reports 
must  be  studied  to  find  out  estimated  volume  and  effects 
of  weather  on  ripening  conditions. 

Emergency  demands  also  arise.  The  summer  of  1917 
was  unfavorable  in  the  Northwest  and  in  Texas.  When 
winter  came  on  thousands  of  cattle  faced  starvation,  or 
the  market  in  a  thin,  emaciated  condition.  In  the  Middle 
"West,  however,  there  was  ample  supply  of  foodstuffs.  Stock 
cars  had  to  be  rushed  at  this  unusual  period  to  carry  the 
cattle  from  the  drought-stricken  regions  to  the  regions  of 
plenty.  During  the  same  year  the  potato  crop  was  threat- 
ened with  destruction  by  early  freezing  weather;  cars  had 
to  be  assembled  to  carry  this  crop.  In  the  autumn  of  1919 
the  railroads  built  up  a  movement  of  coal  from  11,000,000 
tons  weekly  in  September  to  1 3,000,000  in  October,  a  greater 
average  than  for  any  previous  period. 

These  divergent  and  often  antagonistic  demands  make 


128  MARKETING 

the  problem  of  routing  cars  not  only  most  important  but 
also  exceedingly  difficult.  Previous  to  the  war  there  had 
existed  a  great  economic  waste  in  roundabout  routing. 
There  was  circuitous  rail  carriage  and  carriage  over  undue 
distances.  The  result  was  "diluted"  traffic.  The  causes 
were:  (1)  congestion  on  direct  route;  (2)  rate  cutting  by 
weak,  circuitous  routes;  (3)  prorating  practices  in  divi- 
sion of  joint  through  rates;  (4)  desire  for  back-loading  of 
empty  cars;  (5)  interchange  of  traffic  with  connecting 
roads;  (6)  attempts  to  secure  or  hold  shippers  in  contested 
markets.  These  remedies  have  been  suggested:  (1)  more 
strategic  location  of  plants;  (2)  the  establishment  of  a  base 
price  plus  the  freight  rate;  (3)  the  restoration  of  pools 
and  agreements.  Centralization  of  administration  has 
taught  some  good  lessons  in  this  regard  also. 

Intelligent,  foresighted  distribution  and  routing,  speed- 
ing up  freight  through  terminals,  and  more  economical 
loading,  can  help  but  cannot  cure  an  actual  car  shortage. 
On  October  1,  1917,  the  railroads  of  the  country  reported 
that  the  excess  of  unfilled  orders  from  shippers  over  and 
above  idle  cars  at  various  points  was  equal  to  70,380  cars. 
The  idle  freight  ear,  like  the  Federal  Reserve  discount  rate, 
however,  is  a  sensitive  barometer  of  trade.  A  great  sur- 
plus of  cars  appeared  as  a  result  of  the  1907  panic.  An 
almost  equally  large  shortage  is  shown  in  the  figures  for 
1917.  It  appears  that  the  entire  railroad  equipment  is 
deficient.  "The  popular  idea  that  the  trouble  is  mainly 
due  to  car  shortage  is  a  narrow  view  of  the  question.  Evi- 
dence indicates  that  traffic  has  outgrown  the  transportation 
plant;  and  that  for  more  than  a  decade  whenever  business 
has  been  brisk,  railway  service  has  been  inadequate  and  in- 
efficient."14 

95.  Demurrage. — The   freight   car   is  not  only   a   con- 

14  C.  O.  Euggles,  Quarterly  Journal  of  Economics,  November,  1918, 
p.  174. 


TRANSPORTATION  129 

veyance,  but  also  a  traveling  warehouse.  In  this  fact  lies 
a  danger,  for  the  merchant  may  be  inclined  to  be  dilatory 
in  unloading  the  material.  To  speed  up  the  unloading  the 
railroads  make  a  demurrage  charge  after  a  reasonable 
period  of  time.  "When  the  broker,  who  has  only  desk-room 
in  an  office,  tries  to  use  the  freight-cars  as  his  warehouse, 
he  meets  with  an  accumulating  charge  that  quickly  eats 
into  his  profits.  This  charge  began  in  1887  when  the  evil 
of  slow  unloading  was  fully  realized.  The  usual  "free 
time"  is  forty-eight  hours,  after  which  a  charge  of  about 
one  dollar  per  day  was  made  until  this  charge  was  raised 
by  the  Director  General  of  Railroads.  It  is  only  fair  for 
the  railroads  in  their  turn  to  be  responsible  for  neglect 
in  furnishing  cars.  The  uneconomic  methods  of  delaying 
cars,  of  reconsigning  them,  and  of  failure  to  collect  de- 
murrage charge  have  fast  disappeared  in  recent  years. 
The  line  between  the  function  of  the  carrier  and  the  func- 
tion of  the  warehouseman  must  be  clearly  drawn.15 

96.  Trolley  Lines.— On  the  short  haul  much  freight  is 
carried  in  small  lots  by  trolley.  A  study  was  recently 
made  to  show  how  a  market  may  be  controlled  by  the  trol- 
ley lines  serving  it.18  ' '  The  unsatisfactory  and  inadequate 
condition  of  the  trolley  freight  service  is  due  in  the  main 
to  three  reasons:  (a)  the  difference  in  gauge  or  in  wheel 
specifications,  so  that  through  freight  cars  cannot  be  run 
into  the  city;  (b)  want  of  proper  traffic  agreements;  (c) 
want  of  interest  in  certain  of  the  outlying  trolley  lines 
in  the  development  of  trolley  freight. ' '  " 

Such  difficulties,  however,  are  the  mark  of  immature 
development,  and  are  not  inherent.     There  is  no  reason 

15  Cf.  U.  S.  Department  of  Agriculture,  Bulletin  No.  191,  "De- 
murrage  Information  for  Farmers";  C.  O.  Euggles,  op.  cit.,  Nov., 
1918,  pp.  153-161. 

10 Cf.  King,  "A  Study  of  Trolley  Light  Freight  Service,"  Annals 
of  the  American  Academy  of  Political  and  Social  Science,  Oct.,  1912. 

"Ibid.,  p.  17. 


130  MARKETING 

apparent  as  to  why  an  efficient  service  in  light  traffic,  such 
as  milk,  garden  truck,  small  fruits,  butter,  eggs,  and  so 
forth,  may  not  be  secured.  It  is  not  difficult  for  a  trans- 
portation system  serving  only  a  local  community  to  adjust 
its  schedules  to  local  needs. 

97.  Motor-Truck  Lines. — With  the  continued  improve- 
ments in  highways  and  motor  vehicles,  motor-truck  lines  as 
a  method  of  transportation  will  surely  increase.  This 
method  is  more  flexible  than  that  of  steam  railways  or  trol- 
ley lines.  Motor-truck  fleets  were  used  during  the  war 
emergency  to  supplement  the  railways.  Automobiles  often 
deliver  themselves  for  hundreds  of  miles.  Regular  trips  are 
now  made  for  considerable  distances  out  from  large  market 
centers  where  the  roads  will  bear  the  traffic.  As  has  been 
stated,  a  single  firm  in  Indiana  has  a  fleet  of  twenty-five 
trucks.  A  truck  has  been  used  to  carry  cotton  from  the  gin 
in  Gainesville,  Georgia,  where  the  larger  load  and  greater 
speed  made  possible  the  haulage  of  fifty  times  the  amount 
carried  by  wagon.  Forty  bushels  of  potatoes  were  hauled 
to  another  market  through  one  to  two  feet  of  snow.  A 
maximum  load  of  milk  and  garden  truck  was  carried  daily 
to  Duluth  from  twenty-seven  miles  out.  The  goal  of  those 
interested  in  the  development  of  this  means  of  transporta- 
tion is  "to  construct  good  roads  everywhere  and  utilize 
motor  vehicles  entirely  for  local  transportation,  using  rail- 
ways and  trolley  lines  for  long  distance  haulage." 

Movement  of  freight  within  a  market  center  is,  of  course, 
dominated  by  the  truck.  In  Chicago,  however,  there  is  a 
remarkable  underground  system  of  freight  delivery.  Track- 
age of  60  miles  in  length  connects  freight  stations,  and  the 
principal  warehouses  and  wholesale  establishments.  Never- 
theless, the  truck  is  the  most  effective  means  of  city  de- 
livery to-day. 

98.  Conclusion. — The  transportation  system  of  the  coun- 
try is  one  of  the  most  important  commercial  institutions. 


TRANSPORTATION  131 

In  the  marketing  of  many  commodities  it  is  strategic  in 
getting  control.  The  extensive  pipeline  system  of  the 
Standard  Oil  Company  gave  such  an  advantage  in  market- 
ing that  it  was  declared  a  public  utility  and  was  compelled 
by  law  to  be  accessible  equally  to  all  shippers.  The  highest 
degree  of  efficiency  is  necessary  in  performing  the  carrier 
function.  Centralized  control  under  government  direction 
has  achieved  a  mobility  in  freight-car  service  unknown  be- 
fore, and  has  cut  down  the  car  space  needed  for  hauling 
commodities.  For  instance,  coal  shippers  formerly  sent 
1,156  different  kinds  of  coal  to  the  Atlantic  seaboard. 
Under  centralized  direction  this  was  cut  to  41.  By  a  pool- 
ing of  supplies  arrangement,  133,000  freight  cars  were 
saved.  Eailroads  have  agreed  to  cooperate  more  thoroughly 
with  water  routes  by  exchange  of  traffic,  by  issuing  joint 
bills  of  lading,  and  in  connecting  main  lines  to  waterways. 

The  ideal  of  the  carrier  is  to  tap  every  resource  and  to  serve 
adequately  every  market.  This  great  task  must  be  done  effec- 
tively. For  its  fulfilment,  there  is  required  a  stupendous  organi- 
zation, reaching  out  its  tentacles  into  every  hamlet  and  village, 
touching  those  little  pockets  of  fertile  valleys  hidden  away  in 
the  midst  of  vast  mountain  systems,  serving  all  races,  all  cli- 
mates, in  all  seasons.  It  is  thus  that  "transportation  becomes 
the  basis  of  civilization,"  and  is  a  "thing  apart"  from  all  other 
business  organizations.18 

Suggestions  for  Study 

It  will  repay  the  time  spent  in  developing  various  points 
suggested  in  this  discussion.  Material  is  readily  accessible, 
although  for  the  most  part  not  written  from  the  marketing 
point  of  view.  The  following  topics  are  suggested  for  this 
purpose : 

18 C.  S.  Duncan,  "The  Uniform  Bill  of  Lading,"  Journal  of 
Political  Economy,  vol.  xxv,  p.  691. 


132  MARKETING 

1.  The  early  beginnings  of  freight  business  in  United  States. 

2.  General  features  of  early  traffic. 

3.  The  theoretical  basis  of  rates. 

4.  Cost  of  service  and  value  of  service  in  setting  rates. 

5.  Rate  schedules. 

6.  The  traffic  departments. 

7.  Effect  upon  production  and  the  market  of  the  transporta- 
tion factor. 

8.  Power   of   market   control    vested   in   the   transportation 
function. 

9.  Importance  of  transportation  cost  in  marketing. 

10.  The  problem  of  routing  freight. 

11.  The  private  car  problem. 

12.  The  refrigerator  car. 

13.  Freight  classification  and  tariffs. 

14.  Packing  for  shipment. 

Readings  : 

Haney,  Congressional  History  of  Railways,  Chap.  III. 
Acworth,  Elements  of  Railway  Economics,  Chaps.  I,  X. 
McPherson,  Railroad  Freight  Rates  in  Relation  to  Industry  and 

Commerce. 
Ripley,  Railroads;  Rates  and  Regulation. 
Johnson  and  Huebner,  Railroad  Traffic  and  Rates. 
Lasalle  Extension  University,  "The  Traffic  Library." 
Dunn,  American  Transportation  Question. 
Weld,  Private  Freight  Cars  and  American  Railways. 
U.  S.  Department  of  Agriculture,  Bulletin  No.  191,  "Demurrage 

Information  for  Farmers." 
U.  S.  Department  of  Agriculture,  Report  No.  98. 
U.  S.  Department  of  Agriculture,  Bulletin  No.  74. 
Thompson,  Cotton  Field  to  Cotton  Mill,  Chap.  XIV. 
King,  "A  Study  of  Trolley  Light  Freight  Service,"  Annals  of 

the  American  Academy  of  Political  and  Social  Science,  vol.  1. 
Tissenden,  Industrial  Traffic  Management. 
System,  Nov.  1916,  pp.  517-26;  Aug.  1917,  p.  202;  July,  1916, 

pp.  102-9;  Aug.  1916,  pp.  145-7;  Sept.  1917,  pp.  319-21; 

July  1917,  pp.  54-56. 


TRANSPORTATION  133 

U.  S.  Department  of  Agriculture,  Farmers'  Bulletin  703. 
Chicago  Chamber  of  Commerce,  "Chicago :  Its  Transportation 

Facilities." 
U.   S.    Department    of    Commerce,    "The    Transportation    of 

Petroleum." 
U.  S.  Department  of  Agriculture,  No.  701,  1916,  "Possibilities 

of  Market  Train  Service." 

For  further  bibliography  see  bibliography  published  by  the 
Bureau  of  Railway  Economics.  Each  student  should  now  prepare 
a  discussion  of  the  transportation  problem  as  it  affects  the  com- 
modity which  he  has  investigated. 


CHAPTER  VII 

ORGANIZED  EXCHANGES 

99.  What  an  Organized  Exchange  Is. — An  organized 
exchange,  as  the  term  is  used  here,  includes  all  types  of 
produce  exchanges  as  well  as  those  dealing  in  cotton,  coffee, 
iron  and  steel,  tobacco,  etc.  It  may  be  defined  as  an  or- 
ganized market  "which  enables  people  to  buy  and  sell, 
freely,  certain  commodities  either  in  person  or  through  a 
broker;  and  which  in  order  to  facilitate  such  trade  has 
for  its  fundamental  object  the  promotion  of  uniformity  in 
customs  and  usages,  the  inculcation  of  principles  of  justice 
and  equity  in  trade,  the  facilitation  of  the  speedy  adjust- 
ment of  business  disputes,  the  dissemination  of  valuable 
commercial  and  economic  information,  and  the  securing  to 
all  its  members  all  the  benefits  of  cooperation, ' '  *  "  This 
chamber  of  commerce"  [Chicago  Board  of  Trade],  said  the 
Supreme  Court  of  the  United  States,  1905,  "is,  in  the  first 
place  a  market  where,  through  its  1,800  members,  is  trans- 
acted a  large  part  of  the  grain  and  provision  business  of  the 
world.  Of  course,  in  a  modern  market  contracts  are  not 
confined  to  sales  for  immediate  delivery. ' ' 2 

It  is  clear  that  the  phrase  "organized  exchange"  has  ac- 
quired a  semi-technical  meaning.  In  one  sense,  a  depart- 
ment store,  a  bank,  a  warehouse,  or  even  a  trade  center 
itself  may  be  called  an  organized  exchange,  that  is,  an 
organization  which  in  some  way  controls  and  directs  the  in- 

1Huebner,    Annals    of   the   American   Academy    of   Political   and 
Social  Science,  vol.  xxxviii,  p.   3. 
2  88  Fed.  868. 

134 


ORGANIZED  EXCHANGES  135 

terchange  of  goods.  The  distinguishing  feature  must  he  the 
purpose  of  organization,  which  should  be  to  furnish  an 
open  market  under  standardized  practices  for  one  or  a 
group  of  commodities.  In  Chicago,  for  example,  there  are 
three  of  the  greatest  organized  exchanges  in  the  world, 
namely,  the  Chicago  Board  of  Trade,  the  South  Water 
Street  Produce  Market,  and  the  Union  Stock  Yards.  Be- 
sides these,  there  are  minor  markets,  like  the  Butter  and 
Egg  Board,  the  fruit  auction,  and  the  subsidiary  produce 
markets.  The  Stock  Exchange  for  the  purchase  and  sale 
of  stocks  and  bonds  is  purposely  omitted. 

Each  of  these  exchanges  combines  several  functions  for 
the  handling  of  certain  products.  It  is  wise,  however,  to 
distinguish  clearly  the  difference  between  these  institutions 
and  the  functions  performed  in  connection  with  them.  Com- 
mercial grading  of  a  commodity  may  be  essential  to  the 
dealing  in  future  contracts,  but  grading  is  not  a  unique 
function  of  an  organized  exchange.  Market  news  may  be 
necessary  for  intelligent  activity  on  an  exchange,  but  mar- 
ket news  is  quite  necessary  for  intelligent  action  in  any  line 
of  business.  Buying  and  selling  for  future  delivery  may 
take  place  without  connection  with  anything  that  could 
be  called  an  exchange.  The  fundamental,  distinguishing 
feature  of  an  organized  exchange  is  that  it  is  a  continuous, 
open  market,  organized  under  agreed  practices  and  condi- 
tions. Many  important  consequences  flow  from  these  char- 
acteristics. 

100.  Functions  of  Organized  Exchanges. — In  the 
popular  mind  the  chief  function  associated  with  stock,  prod- 
uce, or  other  exchanges  is  speculation,  that  is,  buying  and 
selling  for  future  delivery.  A  moment's  reflection,  how- 
ever, will  reveal  the  fact  that  buying  and  selling  for  future 
delivery  is  a  very  common  characteristic  of  business.  But, 
of  course,  the  meaning  is  the  buying  and  selling  of  contracts 
to  deliver  in  the  future,  in  many  cases  without  any  inten- 


136  MARKETING 

tion  of  asking  for  actual  delivery  of  the  commodities  or 
of  being  able  to  deliver  them.  This  type  of  speculation  is 
characteristic  of  organized  exchanges,  although  probably  a 
result  rather  than  a  cause.  The  primary  function  of  an 
organized  exchange  is  to  bring  buyer  and  seller  together. 
For  this  purpose  there  must  be  an  open,  continuous  market 
or  well-known  regulations,  so  that  buyers  will  not  be  dis- 
appointed when  they  come  to  meet  sellers,  and  vice  versa. 
If  the  producer  of  livestock  starts  for  Chicago  or  Kansas 
City  or  St.  Paul  with  a  carload  of  cattle,  from  a  point 
hundreds  of  miles  away,  he  must  be  assured  in  advance 
of  a  place  where  he  can  offer  his  cattle  for  sale  to  buyers 
who  will  come  to  that  place  to  buy.  This  open  market 
feature  is  basic,  is  fundamental  to  an  organized  exchange. 
Practically  all  other  functions  flow  from  it. 

The  organized  exchange,  to  be  successful,  must  make  it 
easy  and  economical  for  buyers  and  sellers  to  meet  and  to 
transact  business.  Once  more,  it  is  a  question  of  the  best 
way  of  doing  things.  Thousands  of  keen  business  minds 
are  seeking  eagerly  for  better,  more  economical  methods. 
The  organized  exchange,  like  every  other  business  institu- 
tion, must  stand  this  acid  test  of  competition.  There  will 
be  found,  therefore,  in  every  successful  exchange  the  means 
provided  for  each  buyer  and  each  seller,  himself,  or  through 
an  agent  or  a  broker,  to  transact  business  with  ease  and 
with  economy. 

Not  only  must  dealings  through  an  exchange  be  easy  and 
economical  to  make,  but  also  they  must  be  done  with  speed. 
Time  is  of  the  essence  here.  It  is  not  a  matter  of  weeks, 
months,  or  years,  but  of  minutes  and  seconds.  A  deal  in 
wheat  was  put  through  some  time  ago  between  a  broker  in 
Liverpool  and  another  in  Chicago,  in  which  the  Liverpool 
broker  asked  for  quotations  and  the  possibility  to  deliver 
the  amount  of  wheat  desired,  received  the  answer,  and  sent 
back  the  acceptance,  all  between  ten  and  twelve  o'clock, 


ORGANIZED  EXCHANGES  137 

on  a  single  morning.  The  most  efficient  paraphernalia  pos- 
sible is  required  to  expedite  every  transaction. 

Part  of  the  equipment  which  an  organized  exchange  must 
have  to  perform  the  previously  mentioned  functions  is  the 
best  available  telephone  and  telegraph  service ;  the  mechan- 
ism for  securing  contact  with  buyers  and  sellers ;  for  grad- 
ing, weighing,  inspecting;  and  a  means  of  keeping  in  con- 
stant touch  with  every  development  in  the  field  of  pro- 
duction and  consumption.  The  organized  exchange  becomes, 
therefore,  in  itself  a  secondary  mechanism  through  which 
the  risks  of  distribution  are  concentrated  and  are  dealt 
with  in  the  most  nearly  scientific  manner  possible.  "Why 
has  the  commercial  distribution  in  the  United  States  be- 
come so  largely  identified  with  the  speculative  class  of  trad- 
ing capitalists?  The  answer  is  that  it  has  been  found 
best  for  the  producing  and  consuming  interests  of  the  com- 
munity that  the  risks  of  distribution  should  be  localized 
in  a  separate  commercial  class  whose  members  are  in  a 
position  to  inform  themselves  as  to  all  the  factors — past, 
present,  and  prospective — affecting  the  future  course  of 
prices."  3 

The  organized  exchange  becomes,  therefore,  a  sublimated 
brokerage  firm.  In  it  contracts  are  bought  and  sold  by 
brokers.  But  it  becomes,  as  an  open,  continuous  market, 
of  more  influence  than  any  private  brokerage  firm  can  be- 
come. "Upon  that  market  is  concentrated,  in  a  sense,  the 
judgment  of  every  human  being  in  the  world  having  any 
interest  in  production  either  as  consumer  or  producer. ' '  * 
Whatever  may  be  the  abuses  perpetrated  through  organized 
exchanges,  when  they  function  properly,  they  afford  the 
best  known  medium  for  the  intelligent  working  of  supply 
and  demand.  "They  focus  intelligence  from  all  lands  and 
the  prospects  for  the  whole  year  by  bringing  together  minds 

•Fayant,  Some  Thoughts  on  Speculation,  p.  23. 

4Conant,  Function  of  the  Stock  and  Produce  Exchange,  p.  30. 


138  MARKETING 

trained  to  weigh  such  intelligence  and  to  forecast  the  pros- 
pects. They  tend  to  steady  the  markets  more  nearly  to 
their  right  level  than  if  left  to  chance  or  unhindered  manip- 
ulation." 5 

As  services  to  be  rendered  by  a  properly  functioning  or- 
ganized exchange  may  be  mentioned:  (1)  exchanges  give 
mobility  to  capital  and  to  commodities;  (2)  exchanges  be- 
come great  clearing  houses  of  trade  information;  (3)  ex- 
changes steady  market  prices  by  making  possible  the  dis- 
counting of  the  probable  effect  of  an  anticipated  or  known 
event;  (4)  exchanges  help  to  regulate  the  rate  at  which 
the  year's  crops  are  consumed;  (5)  exchanges  serve  to 
level  prices  in  different  markets;  (6)  exchanges  afford  a 
test  of  utility  of  any  commodity  to  the  community  by  giving 
expression  through  price  changes  to  the  community  judg- 
ment; (7)  exchanges,  by  means  of  speculation,  are  prob- 
ably among  the  chief  directive  forces  in  trade  and  indus- 
try; (8)  "The  markets  furnished  by  organized  speculation 
represent  the  most  complete  development  of  the  competi- 
tive system  and  of  democracy  in  trade,  as  opposed  to  mo- 
nopoly and  concentration  of  wealth  and  power;"6  (9)  ex- 
changes distribute  the  risks  among  a  special  commercial 
class,  that  is  particularly  equipped  to  bear  them;  (10)  ex- 
changes afford  an  effective  mechanism  through  which  grad- 
ing of  commodities,  market  information,  and  other  market 
functions  may  be  performed. 

101.  Produce  Exchanges. — The  term  "produce"  is 
generally  understood  to  mean  perishable  provisions  such  as 
vegetables,  fruit,  butter,  eggs,  fish,  poultry.  A  produce 
exchange,  or  organized  produce  market,  then,  is  one  which 
handles  such  commodities.  An  exchange  of  this  kind  will 
be  found  in  all  trade  centers  of  substantial  proportions. 
One  of  the  largest  of  these  markets  to  be  found  anywhere 

5  Judge  Grosscup,  88  Fed.  868. 

6  Brace,  The  Value  of  Organized  Exchanges,  p.  225. 


ORGANIZED  EXCHANGES  139 

in  the  world  is  the  South  Water  Street  Market  in  Chicago. 
This  great  market  has  developed  to  meet  the  increasing 
demands,  but  in  general  its  organization  has  not  kept  pace 
with  its  growth.  The  most  influential  single  organization  is 
the  Wholesale  Grocers  Exchange,  but  there  is  not  here  the 
perfected  mechanism  that  may  be  found  in  the  stock  or 
grain  exchanges.  While  a  daily  rate  sheet,  the  official  bul- 
letin, does  circulate,  there  is  not  the  possibility  of  ascer- 
taining the  "visible  supply,"  i.e.,  the  amount  on  the  way, 
or  the  prospective  supply.  The  live  poultry  dealers,  alone, 
have  central  meetings  daily  at  9:30  A.  M.  Receipts  and 
varieties  are  posted  and  the  dressers  come  there  to  bid  for 
stock.  Here  is  emerging  the  same  type  of  organization  that 
has  developed  elsewhere. 

Although  lacking  in  the  perfected  organization  of  other 
types  of  markets,  the  produce  market  performs  with  rea- 
sonable effectiveness  the  functions  necessary.  It  affords 
an  open  market.  The  shipper  of  produce,  wherever  he  may 
be,  knows  that  there  will  be  a  possible  sale  at  some  price 
for  his  produce,  knows  that  dealers  capable  of  handling 
his  produce  will  be  there  to  take  charge  of  it.  It  is  equipped 
to  handle  any  amount  of  produce  without  notice ;  it  attracts 
buyers;  it  makes  possible  the  meeting  of  buyers  and  sell- 
ers; it  affords  a  speedy  means  of  getting  perishable  prod- 
uce to  retailers  and  consumers.  The  necessary  parapher- 
nalia is  also  provided. 

The  dominant  middleman  in  the  South  Water  Street 
Produce  Market  is  the  jobber.  Commission  merchants  and 
brokers  are  there,  too,  but  according  to  a  report  made  by 
the  Municipal  Markets  Commission  suspicion  on  the  part  of 
producers  of  all  middlemen  who  would  not  buy  outright 
has  somewhat  discredited  them.  To  this  market  come  two 
general  types  of  buyers,  the  retailers  and  the  peddlers.  The 
carts  of  these  two  buyers  are  sent  to  the  market  early  in 
the  morning,  usually  from  5  A.  M.  until  9  A.  M.    Large 


140  MARKETING 

retailers  send  their  own  wagons;  small  retailers  expect  to 
have  their  purchases  delivered  or  to  be  served  by  peddlers. 

Produce  reaches  the  market  by  rail  or  water,  usually, 
although  the  farmers  and  truck  gardeners  haul  in  their 
product  direct  in  some  cases.  What  is  shipped  is  usually 
consigned  to  some  dealer  who  is  not  always  forewarned  of 
its  dispatch.  Lack  of  competent  organization  may  be 
found  everywhere,  and  much  complaint  with  the  market- 
ing methods  may  be  traced  to  this  fact. 

The  South  Water  Street  Produce  Market  may  be  taken 
as  a  type.  Similar  ones  may  be  found  in  New  York,  Boston, 
Philadelphia,  Baltimore,  Washington,  and  elsewhere.  The 
demand  to  perform  the  same  functions  has  produced  the 
same  kinds  of  institutions.  Municipal  markets  for  han- 
dling produce  are  so  like  this  example  in  all  essential  fea- 
tures that  they  need  not  be  described.  The  real  issue  be- 
tween produce  markets  under  private  management  and 
those  under  municipal  management  is  not  one  of  function 
or  organization  but  of  control.  Should  the  control  be  left 
in  the  hands  of  individuals  or  should  it  be  assumed  by  the 
municipality  ? 

102.  Grain  Exchanges. — The  grain  exchanges  are,  next 
to  the  stock  markets,  the  most  highly  developed  market  or- 
ganizations. At  bottom  these  exchanges  are  founded  on 
wheat,  although  they  handle  other  things,  such  as  corn, 
oats,  rye,  flaxseed,  cotton-seed,  hay,  as  well  as  provisions, 
that  is,  cured  meats.  It  has  been  said  that  the  most  nearly 
perfect  marketing  machinery  in  existence  has  been  devel- 
oped to  handle  wheat.  It  has  a  world-wide  market  and  it 
is  grown  over  a  widely-extended  productive  region ;  it  is  not 
readily  perishable  and  it  has  a  flowing  quality  that  aids 
in  handling  it;  the  value  relative  to  weight  and  bulk  is 
such  as  to  carry  it  to  any  market.  Of  greater  importance 
to  the  organized  exchange,  it  can  be  graded  according  to 
general  standards. 


ORGANIZED  EXCHANGES  141 

In  distinction  from  the  produce  market,  the  grain  ex- 
change is  dominated  by  the  broker.  This  fact  is  significant. 
It  means  that  the  exchange  deals  largely  with  contracts  for 
grain,  rather  than  with  the  grain  itself.  There  are  two 
fairly  separate  parts  to  every  grain  exchange.  One  is 
called  the  "spot"  market  and  the  other  the  "futures" 
market.  In  the  "spot"  market,  grain  is  bought  and  sold 
by  sample  in  carload  lots.  Here  the  middleman  is  usually 
a  commission  merchant  or  jobber.  The  grain  is  actually 
in  existence,  on  board  a  car  or  in  an  elevator.  If  this 
part  of  the  organization  stood  alone,  it  would  not  differ 
from  the  conduct  of  business  by  many  other  commission 
merchants  and  jobbers.  It  is,  however,  not  wholly  sepa- 
rated from  the  "futures"  market. 

The  substance  of  the  "futures"  market  is  the  contract. 
In  September  one  may  buy  or  sell  December  or  May  wheat, 
which  means  the  delivery  of  the  amount  contracted  for, 
sometime  during  the  month  named,  the  actual  time  to  be 
set  by  the  seller.  So  at  the  other  periods,  July  and  Sep- 
tember grain  may  be  bought  and  sold.  These  contracts 
may  change  hands  often  and  may  be,  and  many  often  are, 
cancelled  without  demand  for  actual  delivery.  It  is  for  the 
conduct  of  business  in  these  futures  that  all  of  the  para- 
phernalia of  the  grain  exchange  is  required.  This  is  specu- 
lation. 

Such  speculation  is  carried  on  by  brokers,  who  are  mem- 
bers of  the  exchange,  according  to  the  rules  and  regula- 
tions adopted  by  it.  These  brokers  are  not  permitted  on 
the  Chicago  Board  of  Trade  to  buy  and  sell  on  their  own 
account.  In  all  of  their  transactions  they  are  agents  of 
their  clients.  "Whatever  "inside"  information  they  may  get, 
whatever  "tips"  on  the  market,  are  presumed  only  to 
make  them  more  expert,  more  fully  equipped  to  act  intelli- 
gently as  agents.  Their  returns  are  based  upon  the  amount 
of  sales  made,  a  standardized  commission  being  charged. 


142  MARKETING 

Membership  is  transferable.  Dealing  on  the  grain  exchange 
must  be  by  members  only.  But  these  brokers  are  eager  to 
do  business  because  the  greater  the  business  the  larger  their 
returns.     They  maintain,  therefore,  an  open  market. 

Sales  on  the  grain  exchange  may  be  made,  therefore, 
in  two  distinct  ways,  by  sample  in  the  "spot"  market,  and 
by  contract  on  grade  in  the  "futures"  market.  The  former 
is  the  work  of  a  grain  commission  merchant ;  the  latter  of  a 
grain  broker.  Through  either  of  these  channels  grain  may 
be  sold  at  any  time  and  in  any  amount  above  a  stipulated 
minimum,  which  for  wheat  is  5,000  bushels.  Quotations 
are  published  in  the  papers  and  are  spread  broadcast 
throughout  the  country  on  the  "ticker."  It  is  an  open, 
public  market  in  every  sense. 

One  particular  method  of  sale  is  especially  characteristic 
of  the  grain  exchange,  and  indeed  of  other  exchanges  where 
"futures"  are  dealt  in.  It  is  "hedging."  The  dealer  who 
does  not  wish  to  bear  the  risk  of  fluctuating  market  prices, 
the  flour  dealer  for  instance,  may  transfer  that  risk  to  the 
exchange  by  a  double  transaction.  He  may  desire  50,000 
bushels  of  wheat  per  month  to  grind.  To  get  it,  he  will 
buy  for  future  delivery  that  amount,  at  the  price  quoted  on 
the  exchange.  At  the  same  time  he  may  sell  for  future  de- 
livery an  equal  amount  of  wheat.  Then  if  the  market  price 
falls  or  rises,  what  he  may  gain  in  the  one  deal  he  will  lose 
in  the  other.  Market  fluctuations,  however  great,  cannot 
affect  him.  Freed  from  the  risks  attending  unforeseen 
changes  in  market  price,  he  can  devote  himself  solely  to  a 
manufacturer's  profit.  This  method  of  dealing  charac- 
terizes all  exchanges  where  future  contracts  are  bought 
and  sold;  it  is  placing  on  the  shoulders  of  a  professional 
ilass  of  speculators  the  special  burden  which  they  should 
carry.    It  is  a  kind  of  business  insurance. 

103.  The  Cotton  Exchange. — Cotton  exchanges  exhibit 
the  same  essential  characteristics  as  the  grain  exchanges. 


ORGANIZED  EXCHANGES  143 

There  is,  to  be  sure,  a  different  technique  because  of  the 
different  qualities  of  the  commodity,  but  otherwise  the  ex- 
changes are  fundamentally  the  same.  There  are  to  be 
found  here,  also,  brokers  and  commission  men ;  ' '  spot ' '  sales 
and  "future"  sales;  hedging;  all  the  paraphernalia  for 
handling  the  commodity  and  for  grading  it ;  all  the  ma- 
chinery for  collecting  market  news.  The  great  bulk  of 
cotton  transactions  is  made  as  easily,  speedily,  and  eco- 
nomically as  possible. 

In  the  cotton  exchange  there  are  nine  classes  of  dealers. 
There  are  the  commission  merchants  who  sell  cotton  for 
the  planters;  there  are  exporters  who  buy  cotton  for  the 
foreign  market;  there  are  merchants  who  buy  cotton  for 
the  spinners  in  the  United  States;  there  are  the  bankers 
through  whom  all  bills  of  exchange  drawn  against  cotton 
are  negotiated;  there  are  ship  agents  who  represent  the 
great  fleet  of  steamers  and  sailing  vessels  by  which  cotton 
is  carried  abroad  and  to  domestic  ports;  there  are  the  in- 
surance agents  who  arrange  the  insurance  on  the  bulk  of 
the  cotton  seeking  a  market  through  each  port;  there  are 
the  cotton  brokers ;  there  are  the  expert  judges  of  the  raw 
material,  who  buy  cotton  from  representatives  of  the  plant- 
ers for  the  merchants  who  ship  to  Europe  and  to  Ameri- 
can spinners ;  there  are  the  ' '  future ' '  brokers  who  buy  and 
sell  contracts  for  delivery  in  the  future  for  the  account  of 
members  of  the  exchange  or  for  merchants  and  spinners  in 
Europe  and  the  United  States. 

The  methods  of  doing  business  on  the  great  cotton  ex- 
changes, and  especially  on  the  New  York  Exchange,  have  in 
the  past  been  deleterious  to  the  trade.  Future  contracts 
were  deliverable  on  basic  grade;  that  is,  so  many  units, 
"50,000  pounds  or  about  100  square  bales,"  were  bought 
for  future  delivery,  without  specification  as  to  grade.  Any 
standard  grade  within  set  limits  could  then  be  delivered 
on  the  contract  by  the  payment  of  a  fixed  difference  in 


144  MARKETING 

price  per  grade  above  or  below  "middling,"  which  is  the 
"basic"  grade.  As  a  result,  the  spinner  could  never  be 
sure  that  he  would  have  delivered  on  his  contract  a  grade 
of  cotton  that  he  could  use.  It  came  to  be  the  prevailing 
custom  to  deliver  grades  lower  than  "middling."  The 
price  differences  between  grades,  also,  were  unfair  to 
buyers. 

As  a  consequence  there  was  passed  on  August  11,  1916, 
the  Cotton  Futures  Act,  definitely  limiting  the  deliver- 
able grades,  and  establishing  grade  standards  by  scientific 
tests  made  by  the  Department  of  Agriculture.  It  is  also 
definitely  stipulated  by  law  that  there  shall  be  only  two 
cotton  exchanges  where  future  contracts  can  be  bought  and 
sold.  These  are  the  New  York  and  New  Orleans  exchanges. 
In  like  manner,  there  are  fifteen  "spot"  markets  desig- 
nated; Atlanta,  Augusta,  Boston,  Charleston,  Dallas,  Fort 
Worth,  Galveston,  Houston,  Little  Rock,  Memphis,  Mobile, 
Montgomery,  New  Orleans,  Norfolk,  and  Savannah.  Eleven 
out  of  this  list  have  been  selected  as  places  where  the  dif- 
ferences above  or  below  the  contract  price  to  be  paid  for 
grades  tendered  or  delivered  on  the  contract  are  deter- 
mined from  actual  transactions. 

The  sole  purpose  of  this  act  is  to  regulate  conditions 
within  the  cotton  exchanges  so  that  they  will  function 
properly.  The  situation  in  the  cotton  exchange  of  New 
York  was  such  that  the  New  England  spinners  who  bought 
on  grade,  that  is,  for  future  delivery,  could  not  be  assured 
that  the  cotton  actually  delivered  to  them  would  be  of 
such  sort  that  they  could  use  it  at  all.  It  became  a  com- 
mon experience  that  the  great  bulk  of  cotton  really  delivered 
on  exchange  contracts  was  below,  and  a  large  proportion 
far  below,  the  basic  grade.  Furthermore,  the  fixed  dif- 
ferential in  price  gave  the  advantage  to  the  seller.  As  a 
consequence,  the  amount  of  cotton  dealt  in  on  the  New 
York  Exchange  fell  off.     So  necessary,  however,  was  the 


ORGANIZED  EXCHANGES  145 

existence  of  a  central  organized  market,  that  it  was  felt 
to  be  far  better  to  correct  the  error  than  to  dissolve  the 
organization.  This  is  proof  positive  of  the  value  of  the 
service  rendered  by  the  institution.  Under  the  Cotton 
Futures  Act  the  grade  differences  are  now  based  upon  the 
"average  actual  commercial  differences  in  value"  prevailing 
in  not  less  than  five  of  the  dona  fide  "spot"  markets  listed 
above. 

104.  The  Coffee  Exchange. — Coffee,  also,  is  bought  and 
sold  on  grade  and  there  is  an  organized  exchange  in  New 
York  City  to  handle  it.  This  commodity  differs  from  grain 
and  cotton  in  that  it  is  an  import,  while  the  others  are 
largely  exports  or  for  home  consumption.  A  very  large 
part  of  the  coffee  brought  into  the  United  States  comes  from 
Brazil,  and  must  pass  sooner  or  later  into  the  hands  of 
roasting  concerns.  Ninety-seven  per  cent  of  the  coffee  im- 
ported passes  through  the  New  York  exchange. 

There  are  two  kinds  of  markets  for  coffee,  as  for  grain 
and  cotton.  One  is  the  "spot"  market  and  the  other  is  the 
"exchange"  market.  In  the  latter  market,  which  operates 
under  rules  and  regulations,  coffee  is  traded  in  on  the  basis 
of  future  contracts.  The  basic  grade  is  called  No.  7,  which 
is  established  by  the  rules  of  the  trade.  The  exchange  also 
"licenses  the  necessary  coffee  graders,  warehousemen, 
weighmasters,  and  samplers  of  the  exchange. ' ' 7 

In  the  coffee  exchange  there  operate  the  same  groups  of 
middlemen  as  in  other  exchanges.  Brokers,  commission 
houses,  roasters,  importers,  warehousemen,  all  appear. 
Sometimes  the  broker  will  suddenly  turn  jobber  by  pur- 
chasing a  cargo  while  on  the  way,  thus  gaining  full  title  to 
it  and  assuming  all  the  risks  for  it.  Unless  he  can  sell  the 
cargo  before  it  arrives,  he  must  arrange  for  its  unloading 
and  warehousing.     These  middlemen  have  developed  the 

7  Annals  of  the  American  Academy  of  Political  and  Social  Science, 
vol.  xxxviii,  p.  297. 


14G  MARKETING 

same  type  of  organization,  as  is  true  of  grain  and  cotton  and 
produce,  to  secure  market  information  and  to  enable  the 
free  play  of  world  forces,  so  as  to  establish  a  world  price. 

105.  Butter  and  Egg  Board. — A  special  organized  mar- 
ket has  been  developed  in  various  sections  of  the  country 
to  handle  butter  and  eggs.  In  Chicago,  there  is  a  Butter 
and  Egg  Board,  duly  incorporated  to  handle  butter  and 
eggs;  it  has  its  constitution,  its  by-laws  and  its  "butter 
and  egg  rules";  it  appoints  its  own  butter  and  egg  in- 
spectors (By-laws,  Sec.  7)  ;  it  regulates  the  methods  of 
sale;  it  establishes  grades;  it  designates  methods  of  sam- 
pling ;  it  arbitrates  disputes ;  it  makes  possible  the  dealing 
in  spot  sales  and  in  future  contracts.  "Spot  sales  shall 
be  paid  for  when  delivered  unless  otherwise  agreed" 
( Sec.  4) .  "  The  time  on  all  sales  of  butter  on  the  '  call '  for 
future  delivery  is  limited  to  ten  days"   (Sec.  12). 

Much  criticism  has  been  leveled  against  the  methods 
of  the  organized  exchanges  which  deal  with  dairy  products. 
They  have  been  accused  of  manipulation,  of  not  being  open 
markets.  Gradually,  however,  the  business  is  being  toned 
up.  Every  business  institution  in  its  development  passes 
through  its  stage  of  unethical  methods.  "While  bad  busi- 
ness practices  are  never  to  be  condoned,  at  the  same  time 
the  institution  itself  should  not  be  condemned  because  of 
its  misuse  by  unscrupulous  dealers.  Wherever  the  organ- 
ized exchange  can  operate  freely  it  has  proved  its  worth.  Its 
own  members  have  been  educated  by  experience  to  higher 
ethical  standards.  In  so  far,  then,  as  dairy  products  can 
run  on  grade,  in  so  far  as  there  can  be  installed  a  truly 
open  market,  in  so  far  as  the  dealers  on  the  board  are  care- 
fully disciplined  for  misconduct,  the  organized  exchange 
will  justify  itself  as  an  economical  marketing  method. 

106.  Stockyards. — There  have  developed  in  several  trade 
centers  of  the  Middle  West  organized  markets  for  live- 
stock.   Among  these  are  stockyards  in  Chicago,  St.  Louis, 


ORGANIZED  EXCHANGES  147 

St.  Paul,  Kansas  City,  Fort  Worth,  and  Denver.  They 
may  well  be  called  livestock  exchanges.  Because  livestock 
cannot  be  bought  and  sold  on  grade,  since  it  must  be  in- 
spected and  judged  by  experts,  there  is  no  futures  market. 
All  sales  in  the  stockyards  are  spot  sales.  The  cattle  and 
hogs  and  sheep  and  horses  must  be  in  the  stockpens  when 
the  trading  is  done.  In  this  fact  lie  both  an  advantage 
and  a  disadvantage  for  the  seller.  In  the  first  place,  there 
must  be  the  equipment  for  taking  care  of  all  livestock 
that  comes  in.  This  means  a  continuous,  open  market;  on 
the  other  hand,  the  livestock  shipper  cannot  long  withhold 
from  selling,  because  his  is  a  perishable  commodity. 

In  the  trade  centers  named  above,  and  in  others,  there 
are  organizations  to  regulate  and  to  standardize  market 
practices  in  handling  livestock.  A  flat  charge  is  made  for 
the  use  of  stockpens ;  a  standard  charge  is  made  for  feed ; 
all  stock  arriving  must  be  cared  for;  a  standard  charge 
is  made  by  all  commission  men,  who  are  the  predominant 
type  of  middlemen  in  the  stockyards;  to  these  stockyards 
come  the  buyers.  Here  are  all  the  characteristics  of  an 
organized  spot-sales  market. 

The  main  types  of  dealers  in  the  stock-yards  are:  (1) 
the  commission  men,  (2)  the  stock  jobbers,  (3)  the  buyers 
for  the  small  packers,  (4)  the  buyers  for  the  big  packers, 
(5)  the  cattle  feeders,  (6)  the  Eastern  buyers,  (7)  the  for- 
eign buyers.  The  commission  men  have  charge  of  certain 
stockpens  and  receive  the  livestock  on  consignment  or  take 
charge  of  it  when  the  shipper  arrives,  grade  it  so  far  as 
practicable,  and  sell  on  commission.  The  stock  jobber  may 
buy  a  drove  of  cattle,  hogs,  or  sheep  to  speculate  with,  be- 
lieving that  the  price  will  rise  before  the  day's  market 
closes  or  feeling  that  by  grading  he  can  split  the  sales  be- 
tween feeders  and  packers  to  his  own  advantage.  The 
different  classes  of  buyers  are  described  by  the  terms  used. 
Alongside  the  stockyards  are  the  packing  plants  of  the  big 


148  MARKETING 

packers.  They  are  undoubtedly  the  most  potent  factor 
in  the  market.  Their  buyers  are  waited  for  eagerly,  and 
their  bids  are  a  tremendous  factor  in  establishing  the  day 's 
market  price.  They  are  shrewd,  careful  buyers  and  know 
full  well  how  to  drive  a  close  bargain;  they  are  deeply 
learned  in  the  psychology  of  higgling  in  the  market.  The 
small  packers  usually  try  to  pick  up  the  stock  they  need 
early  in  the  day,  take  odd  lots,  or  wait  until  late  for  rem- 
nants. The  foreign  and  Eastern  buyers  are  becoming  a 
smaller  and  smaller  factor  as  the  tendency  grows  to  ship 
meat  instead  of  livestock. 

The  stockyards,  like  the  produce  exchanges,  will  be  able 
to  function  satisfactorily  only  when  the  buyers  and  sellers 
meet  on  a  more  nearly  equal  footing.  As  it  is,  the  sellers 
have  brought  in  a  perishable  product  from  their  homes, 
often  hundreds  of  miles  away,  and  must  sell  or  sustain  an 
increasing  loss  within  the  space  of  a  few  hours.  The 
market  opens  at  seven  o'clock  in  the  morning  and  the  sales 
are  practically  over  J>y  one  o'clock.  The  buyers  of  the 
big  packers,  on  the  contrary,  are  fully  acquainted  with  the 
relative  amount  of  livestock  to  arrive  each  day ;  they  know 
how  many  of  each  grade  they  need  to  make  up  their  weekly 
"pack";  they  are  thoroughly  versed  in  the  psychology  of 
discouragement;  they  have  learned  by  experience  how  to 
gauge  the  encouragement  to  be  given  to  shippers  for  bring- 
ing in  the  necessary  livestock;  they  have  up-to-the-minute 
information  on  the  wholesale  meat  market. 

The  livestock  shippers  have  been  guilty  of  poor  business 
practices.  They  have  sent  unhealthy  animals  to  market; 
they  have  given  them  heavy  feedings  just  before  arriving 
at  the  yards.  If  the  two  parties  are  to  try  to  get  the  ad- 
vantage of  each  other  without  regard  to  good  business 
ethics,  there  will  always  be  much  complaint.  The  condi- 
tions of  the  past  have  inclined  the  public  to  demand  that  the 
stockyards  be  declared  public  utilities  and  thus  come  under 


ORGANIZED  EXCHANGES  149 

the  supervision  of  public  utility  commissions.  The  packers 
have  often  been  accused  of  owning  and  manipulating  these 
organized  markets  for  their  own  advantage.  To  function 
properly,  they  must,  like  the  grain  exchanges,  be  truly  open 
markets,  doing  business  under  strict  principles  set  forth 
by  the  organization  itself. 

107.  Wool  Market. — There  is  no  organized  market  for 
future  trading  in  wool.  Like  produce  and  livestock,  it  can- 
not be  sold  on  grade,  but  must  be  inspected,  sampled,  and 
judged.  A  well-trained  expert  is  required  for  buying  wool 
intelligently.  While  in  the  grease,  it  must  be  judged  as  to 
amount  and  quality  when  scoured.  In  the  wool  trade  a 
judgment  is  called  bad  that  misses  the  result  by  more 
than  1  per  cent. 

There  is  no  great,  organized  wool  market  in  the  United 
States  to  compare  with  those  of  London  and  Antwerp. 
These  great,  organized  markets  are  spot-sales  markets  and 
are  called  auctions,  because  the  wool  is  actually  auctioned 
off.  An  attempt  was  made  in  1894  to  establish  the  New 
York  Wool  Exchange,  but  it  proved  to  be  a  failure.  It  is 
interesting  to  note  that  several  of  the  functions  of  an  or- 
ganized exchange  in  wool  are  performed  by  the  wool  mer- 
chant in  such  Eastern  markets  as  Boston,  New  York,  and 
Philadelphia.  These  functions  are  performed  in  connection 
with  the  warehousing  of  wool.  It  is  the  duty  of  the  wool 
merchant  to  offer  to  spinners  an  open,  continuous  wool 
market,  where  they  can  come  at  any  time  and  secure  the 
amount  and  the  quality  of  wool  they  desire.  Grading,  mar- 
ket information,  financing,  concentration  of  supply  are  all 
within  the  duties  of  the  wool  merchant.  The  large  concen- 
tration warehouses  in  the  East  afford  the  nearest  approach 
to  an  organized  exchange.  The  strategic  position  of  the 
wool  merchant  has  already  been  indicated. 


150  MARKETING 

If  the  wool-marketing  methods  of  the  United  States  are  capable 
of  material  betterment,  it  is  along  the  line  of  increasing  the  effi- 
ciency of  the  wool  merchant's  methods  and  equipment,  and  not 
by  the  elimination  of  this  type  of  middleman.  .    .    . 

If  the  economic  pressure  should  put  a  stop  to  the  careless 
methods  of  growing  and  packing  wools  which  have  characterized 
the  American  industry  for  so  long,  and  if  the  possibilities  of 
substantial  profits  from  wool  growing  under  better  methods 
should  be  demonstrated  beyond  dispute,  then  it  would  not  be 
long  until  domestic  wools  would  appear  in  the  market  on  an  en- 
tirely new  basis.  Much  of  the  present  speculative  element  of 
the  wool  merchant's  functions  would  be  gone.  Auction  sales, 
both  at  local  points  in  the  West  and  at  the  chief  Eastern  buying 
centers,  would  become  both   possible  and  desirable. 

Whether  this  would  mean  the  "elimination  of  the  middle- 
men" and  more  direct  contact  between  growers  and  mills  is  by 
no  means  certain.  But  it  is  certain  that  much  of  the  speculative 
lure  would  be  removed  from  the  wool  merchant's  business  as 
it  is  at  present  conducted.  As  an  assembling  business  done  on  a 
narrow  margin  and  depending  on  volume  of  profits,  wool-dealing 
might  not  be  as  attractive  a  business  as  it  now  is.  It  might 
still  perform  an  indispensable  function  and  do  it  more  effectively 
and  at  less  cost  than  it  could  be  performed  by  direct  sale.  Better 
wool  growing,  better  wool,  and  better  preparation  for  the  market 
may  mean  radical  change  in  the  work  of  the  wool  merchant, 
but  they  do  not  necessarily  involve  his  extermination.8 

108.  Iron  and  Steel  Institute. — A  relatively  loose  orga- 
nization has  developed  in  the  iron  and  steel  industry.  It 
may  be  said  that  there  is  no  distinct,  organized  exchange 
to  handle  these  materials.  In  New  York  there  is  an  ex- 
change which  deals  in  "iron  warrants,"  but  it  has  never 
attained  much  influence.  However,  most  of  the  functions 
of  the  organized  exchange  are  performed  either  by  the 
great  steel  companies  themselves  or  by  the  American  Iron 
and  Steel  Association  and  the  American  Metal  Market  Co. 

■  Cherington,  The  Wool  Industry,  p.  73. 


ORGANIZED  EXCHANGES  151 

As  will  be  shown  later  under  market  information,  the 
essential  function  of  these  associations  is  the  collection 
and  dissemination  of  the  current  news  of  the  iron  and  steel 
industry.,,  There  are,  in  particular,  the  Daily  Iran  and 
Steel  Reports  and  the  Steel  and  Metal  Digest. 

It  must  be  remembered  that  the  production  of  ore  can 
be  substantially  controlled  because  of  centralized  organiza- 
tion; it  is  also  to  be  remembered  that  iron  and  steel  are 
very  largely  manufactured  on  order,  and  that  between 
80  arid  90  per  cent  of  the  entire  output  of  pig  iron  is 
used  by  the  plants  making  it,  for  further  fabrication. 
This  leaves  a  very  small  percentage  for  open  market  pur- 
poses. Obviously,  the  character  of  the  productive  organi- 
zations and  the  character  of  the  commodity  do  not  demand 
the  services  of  a  great  organized  exchange.  On  the  financial 
side,  however,  through  stocks  and  bonds,  the  functions  of 
the  highly  developed  stock  exchanges  are  utilized. 

109.  Sugar  Exchanges. — At  present  there  are  but  two 
sugar  exchanges  in  the  United  States;  one  in  New  York, 
and  the  other  in  New  Orleans.  The  New  York  exchange 
handles  only  raw  sugar.  It  also,  unlike  the  New  Orleans 
exchange,  deals  in  ' '  futures, ' '  a  comparatively  new  feature 
in  the  sugar  industry  of  this  country.  These  future  trans- 
actions have  a  tendency  to  minimize  seasonal  depressions 
due  to  the  natural  scarcity  of  stock  during  certain  months, 
and  tend  to  promote  a  uniform  price.  The  New  Orleans 
Sugar  Exchange  deals  in  "spot  transactions"  and  is  the 
only  commercial  body  in  the  world  which  devotes  itself 
exclusively  to  sugar.  It  is  ideally  located  for  warehous- 
ing and  shipping.  Here  information  is  received  from  all 
parts  of  the  world  as  to  the  size  of  and  prospects  for  the 
world  crop.  The  American  Sugar  Exchange  and  the  Sugar 
Equalization  Board  took  over  largely  the  functions  of  the 
organized  exchanges  during  the  war. 

The  advantages  of  the  sugar  exchange  are:     (1)  It  pro- 


152  MARKETING 

vides  an  open  and  continuous  market,  and  brings  the  buyers 
and  sellers  together,  the  refineries  buying  their  sugar  on 
the  New  York  Exchange;  (2)  it  gives  the  quality  of 
mobility  to  the  sugar  crop;  (3)  it  steadies  price;  (4)  it 
helps  to  regulate  the  rate  at  which  the  year's  crop  is 
consumed;  (5)  it  tends  to  level  out  the  market  price.  As 
has  been  shown,  these  are  the  bona  fide  functions  of  an 
organized  exchange. 

110.  The  Auction. — As  an  institution  the  auction  is  not 
new.  The  primary  principle  is  that  of  an  open  market 
where  all  buyers  may  come  and  where  the  goods  for  sale 
are  "knocked  down"  to  the  highest  responsible  bidders. 
An  auction  may  be  held  with  or  without  an  organization. 
The  professional  auctioneer  is  familiar  to  many  sections 
of  the  country.  When  a  farmer  desires  to  move  to  a  new 
part  of  the  country  or  to  quit  farming,  he  may  want  to 
sell  off  his  livestock,  vehicles,  crops,  and  household  goods. 
A  date  is  then  set  for  a  public  auction.  Or  property  may 
be  sold  at  auction  for  taxes;  auctions  may  be  held  to  dis- 
pose of  blooded  livestock.  In  the  cities  auctions  are  often 
held  in  jewelry  stores.  The  street  fakir  sells  patent  medi- 
cine at  auction.  Tobacco  may  be  sold  in  the  warehouses  at 
auction.  Furs  are  sold  at  such  auctions.  The  most  highly- 
developed  permanent  organization  for  an  auction  market 
is  to  be  found  in  the  fruit  trade. 

It  is  the  type  of  auction  that  handles  citrus  fruits  and 
other  highly-perishable  fruits  that  approaches  most  nearly 
to  the  organized  exchange  as  defined  here.  To  secure  such 
an  organization  there  must  be  a  continuous  supply  of 
commodities,  such  as  will  justify  an  open  and  continuous 
market.  This  is  a  simple,  direct,  although  somewhat  crude, 
method  of  marketing.  Quick  action  does  result,  for  the 
entire  lot,  often  comprising  many  carloads  of  produce,  can 
be  sold  within  a  few  minutes. 

Beginning  at  five  o'clock  in  the  morning,  through  the 


ORGANIZED  EXCHANGES 


153 


summer  months,  the  buyers  appear  in  the  large  warehouse 
room  where  the  produce  is  on  display.  Samples  of  each 
lot  are  open  for  inspection,  and  the  buyers  move  from  one 


CHART    OF    THE    AUCTION    SYSTEM    OF    HANDLING    PRODUCE 
(Copyrighted  by  Victor  K.  Mcllheny :  Reprinted  by  permission.) 

consignment  to  another  jotting  down  notes  against  each 
one  on  the  advance  sheets  of  receipts  that  are  handed 
around.     At  seven-thirty  or  later  a  bell  rings  and  the 


154  MARKETING 

buyers  go  up  to  the  "school-room,"  i.e.,  the  auction  room 
tilled  up  with  school-room  desks.  The  buyers  seat  them- 
selves; the  auctioneer  takes  charge;  the  tally  sheets  are 
corrected,  i.e.,  broken  boxes,  number  of  boxes,  etc.,  are 
indicated.  The  auction  then  continues  after  the  typical 
manner  of  auctions. 

These  auctions,  which  exist  in  fifteen  or  more  cities, 
work  under  established  rules,  handle  produce  on  grade, 
supply  information  as  to  the  amount  and  quality  of 
arrivals,  and  maintain  a  continuous,  open  market  where 
buyers  and  sellers  may  meet,  as  do  all  organized  exchanges. 
It  is  a  unique  characteristic  of  the  auction  that  the  selling 
is  concentrated  in  the  hands  of  one  man,  the  auctioneer. 
In  the  grain  exchange  all  brokers  are  auctioneers.  A 
graphic  picture  by  the  advocates  of  the  auction  method  of 
handling  produce  is  given  in  the  chart  reproduced  on 
page  153. 

111.  Cooperative  Organization. — An  organized  exchange 
may  take  the  form  of  cooperation.  The  most  conspicuous 
example  is  that  of  the  California  Fruit  Growers  Exchange. 
The  headquarters  of  this  gigantic  organization  is  in  Los 
Angeles,  from  which,  by  means  of  the  telegraph,  sales  are 
made  in  all  of  the  important  trade  centers. 

The  California  Fruit  Growers  Exchange  is  composed  of  one 
central  exchange,  17  district  exchanges,  and  a  large  number  of 
local  producers'  associations.  The  central  exchange  on  the  one 
hand  represents  the  producers  and  on  the  other  directs  the  busi- 
ness of  selling.  Through  it  the  growers  and  sellers  communi- 
cate. The  sellers  receive  their  orders  from  the  growers  and  are 
thus  controlled  by  them.  If  one  will  think  of  a  telephone  ex- 
change into  which  lead  a  great  many  wires  and  out  of  which 
lead  a  great  many  more,  one  will  be  able  to  see  much  more 
clearly  the  services  of  the  central  exchange.9 

9C.  S.  Duncan,  "Concentration  in  the  Marketing  of  Citrus  Fruits," 
Community  Leaflet  No.  20,  p.  18. 


ORGANIZED  EXCHANGES  155 

This  organization,  and  others  built  on  the  same  type, 
perform  the  same  functions  as  other  organized  exchanges. 
The  fundamental  difference  is  that  it  represents  only  one 
side  of  the  market,  namely,  selling.  The  purpose  is  to 
retain  for  the  growers  all  their  independence  of  will  and 
action  and  at  the  same  time  gain  for  them  all  the  advan- 
tages and  economies  of  large-scale  distribution.  By  means 
of  centralization  in  a  cooperative  exchange,  the  growers 
can  meet  the  buyers  in  the  market  on  equal  terms,  without 
losing  a  whit  of  their  individuality  and  independence. 
Men  cooperate  either  to  buy  or  sell.  A  cooperative  organ- 
ization, therefore,  like  the  auction,  is  intended  only  for 
one  half  of  a  true  open  market.  Sellers  and  buyers  are 
brought  together,  to  be  sure,  but  the  organization  itself 
is  brought  into  being  to  aid  one  side;  it  is  not  a  real 
exchange. 

112.  Municipal  Markets. — There  is  no  new  principle  in 
municipal  markets.  Their  organization  must  be  able  to 
perform  the  same  functions  as  that  of  any  other  kind  of 
exchange.  The  difference  is  in  control.  In  the  one  case 
it  is  in  the  hands  of  a  private  organization,  in  the  other 
it  is  vested  in  the  city.  The  sole  question  at  issue  is 
whether  the  services  will  be  performed  more  efficiently 
in  the  one  case  than  in  the  other.  This  issue  does  not  fall 
within  the  scope  of  this  discussion. 

113.  Speculation  as  a  Commercial  Problem. — H.  C. 
Emery  says  of  speculation  on  stock  and  produce  exchanges 
in  the  United  States: 

Speculation  has  become  an  increasingly  important  factor  in  the 
economic  world  without  receiving  a  corresponding  place  in  eco- 
nomic science.  In  the  field  in  which  it  acts,  in  the  trade  in  grain 
and  cotton  and  securities  and  the  like,  speculation  is  the  pre- 
dominant influence  in  determining  price,  and  as  such  it  is  one  of 
the  chief  directive  forces  in  trade  and  industry.  .  .  .  The  stock 
and  produce  exchanges  are  the  nerve  centers  of  the  industrial 


156  MARKETING 

body,  and  are  in  themselves  as  neeessaiy  institutions  as  the  fac- 
tory and  the  bank.10 

The  main  point  to  consider  in  this  connection  is  the 
fact  that  a  real  bona  fide  transaction,  a  real  buying  and 
a  real  selling,  takes  place,  and  that  the  buyer  and  seller 
satisfy  all  of  the  legal  and  other  obligations,  and  possess 
the  same  rights  and  responsibilities,  and  title  to  the  goods, 
that  attend  any  other  kind  of  transaction.  "Speculation 
of  this  kind  by  competent  men  is  the  self-adjustment  of 
society  to  the  probable.  Its  value  is  well-known  as  a 
means  of  avoiding  or  mitigating  catastrophes,  equalizing 
prices,  and  providing  for  periods  of  want."  1X 

Speculation  is  the  attempt  to  determine  not  only  what  is, 
but  also  what  is  to  be,  the  demand  and  supply  of  any 
given  commodity.  Therefore,  such  exchanges  as  those  de- 
scribed above  have  built  up  great  organizations  for  secur- 
ing trade  news  and  for  transmitting  it  quickly.  Every 
event,  actual  or  probable,  anywhere  in  the  world,  affecting 
the  marketing  of  a  given  commodity  finds  quick  reflection 
on  the  exchange,  and  with  equal  speed,  by  means  of  buying 
or  selling,  and  thus  affecting  prices,  adjustment  is  made 
in  accordance  with  the  event.  This  process  is  called  dis- 
counting the  future,  and  has  been  presumed  to  stabilize 
the  market,  to  steady  the  price. 

"Great  fluctuations  in  price  come  usually  from  catastrophe 
or  ignorance.    Knowledge  is  the  great  price  stabilizer. 

Where  there  is  a  high  degree  of  certainty,  prices  will  be  as 
stable  as  conditions  permit,  and  more  can  not  legitimately  be  ex- 
pected. Insistence  upon  the  advisability  of  emphasizing  the  de- 
gree of  certainty  does  not  in  any  way  imply  that  the  reasoning 
about  speculation  and  prices  is  wrong.  The  doctrine  that  specu- 
lation tends  to  stabilize  prices  is  true,  but  it  states  only  part 

10  Emery,  Speculation  in  the  United  States,  p.  290. 
"88  Federal  868. 


ORGANIZED  EXCHANGES  157 

of  the  truth.  With  reference  to  the  recent  improvements  in 
marketing,  increase  in  relative  stability  of  prices  has  been  sig- 
nificant. The  conspicuous  change  lies  in  the  great  increase  in 
certainty.12 

The  peculiar  type  of  speculation,  the  dealing  in  future 
contracts  without  the  expectation  to  give  or  require  de- 
livery, has  led  to  the  development  of  a  marvelously  sensi- 
tive mechanism  for  the  adjustment  of  price.  The  most 
vital  part  of  this  mechanism  is  market  news.  Without  mar- 
ket news  an  organized  exchange  would  have  no  advantage ; 
with  it,  there  results  the  "struggle  of  well-equipped  in- 
telligence against  the  rough  power  of  chance. ' ' 13 

114.  Conclusion. — A  review  has  been  made  of  the  organ- 
ized exchange,  its  definition,  its  functions,  and  its  various 
types.  Something  has  also  been  said  of  the  value  of  specu- 
lation so  commonly  associated  with  the  organized  exchange 
in  the  popular  mind.  No  attempt  has  been  made  to 
appraise  the  exchange,  or  to  defend  or  criticize  its  activities. 
It  is  obvious  to  any  observer  of  business  methods  that  many 
of  them  are  correcting  themselves.  Of  their  importance 
to-day  there  can  be  no  question.  If  they  do  not  correct 
themselves,  the  public  will  demand  that  they  become  public 
utilities  and  pass  under  regulation. 

Suggestions  for  Study 

The  student  should  study  the  organized  exchange  in 
relation  to  the  commodity  that  he  is  investigating.  For 
classroom  work  the  following  topics  may  be  taken  up  for 
discussion : 

1.  When  and  why  an  exchange  is  needed. 

2.  Organized  exchanges  as  a  means  of  market  control. 

"Usher,    American   Economic   Review,   March,    1916,    p.   60. 
"Emery,  op.  cit.,  p.  463. 


158  MARKETING 

3.  The  producer's  interest  in  exchanges. 

4.  Interest  of  dealers  in  exchanges. 

5.  Consumer's  interest  in  exchanges. 

6.  Character  of  commodity,  of  market,  in  relation  to  orga- 

nized exchange. 

7.  The  clearing  house  of  the  exchange. 

8.  "Ringing  out"  on  the  exchange. 

9.  Control  of  exchanges. 

10.     Place  of  the  organized  exchange  in  commercial  organiza- 
tion. 

Readings  : 

Brace,  Value  of  Organised  Speculation. 

Emery,  Speculation  in  the  United  States. 

Huebner,  Agricultural  Commerce,  Chap.  IX. 

Weld,  Marketing,  Farm  Products,  Chap.  XV. 

Annals    of   the   American   Academy   of   Political   and   Social 

Science,  vol.  xxxviii. 
U.  S.  Department  of  Commerce,  "Report  of  Commissioner  of 

Corporations  on  Cotton  Exchanges." 
McHugh,  "Form,  Development,  and  Economic  Function  of  the 

Grain  Exchange,"  Annals  of  the  American  Academy  of 

Political  and  Social  Science,  vol.  xxxiii,  pp.  1-35. 
Fayant,  Thoughts  Upon  Speculation,  Chap  I. 


CHAPTER  VIII 


THE  WAREHOUSE 


The  warehouse  is  an  ancient  and  honorable  institution, 
having  long  been  known  through  the  story  of  Joseph  and 
his  storage  of  corn  in  Egypt  during  the  seven  lean  years. 
Its  real  beginning,  however,  fades  away  into  unrecorded 
antiquity.  But  the  history  of  the  warehouse  is  not  a  part 
of  this  discussion.  Within  recent  years  there  has  been 
such  a  remarkable  development  of  warehousing,  par- 
ticularly for  the  great  staple  crops,  like  cotton  and  grain, 
and  in  cold  storage,  as  to  make  the  industry  a  practically 
new  one.  In  the  discussion,  narrowed  in  this  way,  the 
attention  will  be  concentrated  upon  function  rather  than 
upon  descriptive  detail. 

115.  Recent  Developments  in  Warehousing. — In  the 
"Warehousing  Industry  in  the  United  States,"  published 
by  the  U.  S.  Department  of  Commerce  and  Labor,  the 
progress  of  warehousing  is  commented  on  as  follows: 

The  problem  of  caring  for  the  commercial  surplus  of 
the  annual  output  of  industry  and  of  keeping  in  custody 
that  reserve  of  storable  utilities  not  required  at  any  given 
time  by  the  community  has,  within  the  last  decade, 
become  an  increasingly  important  feature  of  business  in  the 
United  States.  This  division  of  enterprise  is  usually  spoken 
of  as  the  warehousing  industry,  including  storage,  transfer,  and 
cognate  activities.  The  progress  of  cold  storage  has  given  a 
technical  turn  to  warehousing  which  was  entirely  foreign  to  it 
twenty-five  years  ago,  but  which  has  done  more  than  anything 

159 


ICO  MARKETING 

else  to  put  the  warehousing  industry  on  a  scientific  basis.  It  is 
not  too  much  to  say  that  every  other  branch  of  storage  has  been 
favorably  affected  by  the  systematic  methods  of  refrigeration. 
The  development  of  this  mode  of  preserving  perishables  is,  how- 
ever, probably  due  as  much  to  the  transporter  as  to  the  ware- 
houseman. Commerce  seems  first  to  have  seen  the  necessity  of 
discovering  some  method  of  preserving  food  supplies  in  the 
course  of  transportation  between  the  most  favorable  areas  of 
production  and  the  best  markets  for  consumption.  This  solution, 
resulting  in  increasing  the  place-values  of  the  output  of  distant 
lands,  was  a  commercial  achievement  due  to  the  application  of 
science  to  transportation.  The  other  feature  of  the  problem 
was  that  of  giving  time-values  to  perishables  which  could  not 
be  consumed  in  the  season  of  production,  but  could  be  carried 
over  into  the  seasons  of  least  supply.  This  has  been  the  achieve- 
ment of  the  warehouseman,  aided  by  the  application  of  the 
principles  of  science  to  the  conditions  of  this  industry.1 

Thus  begins  the  first  and  last  general  investigation  of 
warehousing  by  the  government.  Special  studies  on  cold 
storages,  grain  elevators,  and  cotton  warehouses  have  been 
made,  and  with  special  purposes  in  view.  The  economic 
problems  connected  with  warehousing,  and  particularly  the 
commercial  aspects  of  these  problems,  have  never  been 
thoroughly  discussed.  The  most  comprehensive  treatment 
of  the  subject  recently  made  gives  a  general  survey  of 
types  and  problems.2 

It  remains  yet  to  be  shown  how  fundamental  to  modern 
commercial  and  industrial  development  the  warehouse  has 
been  and  is. 

Warehousemen  generally  agree  that  the  industry  falls 
far  short  of  mature  development.  The  remarkable  progress 
in  refrigeration,  the  increased  demands  for  surplus  stocks 
by  large  scale  manufacturing  and  distributing  plants,  the 

1  October,  1903,  p.  1035. 

a  Cf.  Lorain  Fortney,  The  Warehousing  Industry. 


THE  WAREHOUSE  1G1 

need  for  nation-wide  service  in  handling  machine  acces- 
sories and  parts,  the  greater  and  greater  concentration  of 
population  in  cities  where  the  family  storage  room  is 
strictly  limited  to  one  or  two  days'  supply,  the  widening 
markets  demanding  the  accumulation  of  goods  in  vast  store- 
houses in  different  parts  of  the  world — all  of  these  and 
other  characteristics  of  modern  commerce  have  brought 
about  a  greatly  increased  development  in  warehousing  of 
all  kinds. 

In  rural  districts  storage  in  some  form  has  long  been  a 
familiar  problem.  Fruits  and  vegetables  have  been 
"banked"  in  the  ground,  protected  by  earth  and  straw 
from  the  frost  and  wet,  or  have  been  placed  in  a  cellar 
either  built  beneath  the  house  or  as  an  independent  struc- 
ture. Grain  and  hay  are  stored  away  in  barns;  machinery 
in  sheds.  Nearly  all  of  the  problems  of  warehousing  may 
be  found  in  simple  form  in  the  country.  This  is  true  of 
cold  storage,  too.  It  is  necessary  to  protect  perishable 
food  products  from  the  cold  of  winter,  as  well  as  from 
the  heat  of  summer.  The  warmly  constructed  cellar  and 
the  cool  spring-house  are  counterparts. 

In  towns  and  cities  the  warehousing  problems  grow  in 
proportions  and  complexity.  Demand  has  grown  stronger 
and  stronger  for  a  more  definite  isolation  of  the  warehous- 
ing function.  In  the  great  trade  centers  the  amount  of 
storage  space  has  become  enormous.  The  warehouses  of 
Chicago,  for  instance,  other  than  grain  elevators  and  cold 
storages,  have  a  total  storage  space  of  4,500,000  square  feet. 
The  total  capacity  of  grain  elevators  is  about  45,000,000 
bushels.  In  the  great  free  port  of  Hamburg  there  is  storage 
space  of  approximately  4,663,944  square  feet. 

The  roundabout  process  in  modern  industry  has  made 
necessary  the  storing  of  goods,  machines  and  spare  parts. 
Heavy  overhead  is  present  in  a  plant  continuously  even 
though  it  makes  seasonal  goods,  so  that  these  goods  need 


162  MARKETING 

storage  space,  awaiting  the  season  of  demand.  Manufac- 
turers of  automobiles  must  furnish  convenient  service  in 
accessories  and  spare  parts  to  all  sections  of  a  great  market ; 
makers  of  agricultural  implements,  like  the  International 
Harvester  Company,  must  be  able  to  furnish  on  telegraphic 
order  any  possible  part  of  any  machine  they  put  out.  The 
steel  mills  must  accumulate  an  adequate  supply  of  raw 
materials  and  fuel.  The  mail-order  house  must  have  its 
stores  from  which  to  fill  orders.  Storage  touches  every 
phase  of  industry  and  commerce.  "A  definite  portion  of 
the  resources  of  civilization  is  always,  so  to  speak,  'in 
storage.'  " 

As  soon  as  a  margin  appears  between  production  and 
consumption,  the  demand  for  storage  or  warehousing 
begins.  It  aims  not  only  to  preserve  the  accumulations  of 
the  past,  valuable  for  record  or  because  of  their  associa- 
tions, or  for  adornment,  but  also  to  provide  against  future 
want.  As  industrial  society  grows  more  complex,  as  it 
develops  interdependency,  specialization,  and  systems  of 
exchange,  the  industrial  and  commercial  needs  for  storage 
greatly  increase.  Learning  the  lesson  from  experience  and 
from  nature  itself,  men  began  to  care  for  surpluses  and 
accumulations.  To-day,  there  is  a  world-wide  warehousing 
industry,  absolutely  indispensable  for  industry,  for  trade, 
and  for  human  welfare. 

There  appear  to  be  three  tendencies  along  which  the 
development  of  warehousing  is  now  taking  place.  "In  the 
one  case  the  warehouse  would  naturally  seem  to  be  a  com- 
mercial institution  because  of  its  close  connection  with 
trade  movements.  In  the  other  case  the  discharge  of  the 
duties  involved  in  warehousing  is  such  as  to  give  the  estab- 
lishment a  status  which  is  more  nearly  allied  to  that  of 
the  bank  than  to  that  of  the  mercantile  house. ' ' 3 

A    third    tendency    is    connected    with    manufacturing 

""Warehousing  Industry  in  the  United  States,"  op  cit.,  p.  1088. 


THE  WAREHOUSE  163 

rather  than  with  trade  and  aims  at  leveling  out  seasonal 
industries,  at  carrying  surplus  or  reserve  materials  and 
stocks.  The  functions  performed  in  each  case  will  be  dis- 
cussed in  the  following  section. 

116.  Functions  of  the  Warehouse. — There  are  many  im- 
portant services  which  the  warehouse  performs.  Not  all 
of  these  belong  to  it  as  a  distinct  institution;  several,  in 
fact,  are  performed  incidentally  to  the  real  business.  They 
are  as  follows: 

(a)  Storage. — The  primary  function  of  the  warehouse 
is  to  save  the  surplus  or  reserve  of  "storable  utilities."" 
There  are  surplus  and  deficit  communities,  nations,  seasons. 
It  is  the  duty  of  the  warehouse  to  accumulate  during  the 
flush  season  or  in  the  surplus  community  or  country,  for 
the  purpose  of  distribution  in  the  season,  district  or  coun- 
try of  scarcity.  Economically  speaking,  the  storing  of 
goods  is  for  the  purpose  of  creating  time-utilities. 

(&)  Sharing  the  Risks. — The  warehouseman,  when  he 
receives  goods,  accepts  the  responsibility  to  deliver  them  in 
as  good  condition  as  he  received  them.  In  this  way  he 
takes  from  the  owner  the  risk  for  the  goods  in  his  care 
while  they  accumulate  time-utilities.  While  storage  is  the 
primary  function,  under  our  modern  business  organiza- 
tion this  corollary  function  is  practically  forced  upon  the 
warehouseman. 

(c)  Placing  Insurance. — In  order  to  share  the  above  risk 
with  the  community,  the  warehouseman,  in  turn,  takes  out 
an  insurance  policy  against  the  goods  which  he  receives. 
Because  he  has  used  care  in  the  construction  of  his  ware- 
house, and  because  he  is  especially  equipped  to  look  out 
for  them,  the  rate  of  insurance  is  low.  Thus,  the  burden 
of  the  risk  is  not  only  spread  over  many  people,  but  also 
the  risk  itself  is  reduced  to  a  minimum. 

(d)  Financing  Depositors. — The  warehouse  is  a  com- 
modity bank.     Against  the  goods  credit  is  granted  and 


164  MARKETING 

thus  the  owners  are  financed  until  the  goods  are  sold.  This 
is  a  particularly  important  and  a  continually  increasing 
service  to  the  small  manufacturer,  who  makes  seasonal 
goods.  As  they  accumulate  in  the  warehouse  it  is  possible 
for  him  to  draw  against  them  on  a  warehouse  receipt  and 
so  finance  his  plant  to  run  continuously. 

(e)  Handling  and  Transfer  of  Goods. — It  is  possible  to 
consign  goods  to  a  warehouseman  for  handling  in  the  trade 
center  and  for  transferring  them  either  to  another  trans- 
portation line  or  to  the  purchaser.  These  services  are  also 
clearly  subsidiary  to  the  primary  storage  function. 

(/)  Sorting,  Packing,  Labeling. — Other  incidental  serv- 
ices which  are  frequently  performed  by  the  warehouse- 
man are  sorting  the  commodities,  packing  them  for  ship- 
ment or  storage,  and  placing  the  proper  labels  on  them. 

(g)  Cleaning,  Drying,  Etc. — In  the  same  category  are 
the  cleaning,  drying,  or  other  preparation  of  the  goods  to 
make  them  more  readily  marketable.  The  elevator  man 
may  fan  the  chaff  or  the  dampness  out  of  the  grain.  A 
great  social  service  was  done  by  the  warehousemen  in  the 
autumn  of  1917  when  they  received  the  water-soaked  corn 
from  all  sections  of  the  corn  belt  and  put  it  through  a 
drying  process,  thus  making  possible  the  redemption  of  a 
part  of  the  food  value  of  that  great  crop. 

(h)  Inspection  of  Goods. — Receipts  cannot  be  drawn 
against  goods  until  their  character  is  determined.  For  this 
purpose  the  warehouseman  inspects  the  goods  upon  arrival, 
unless  they  have  previously  been  inspected  by  a  respon- 
sible party.  To  ascertain  whether  or  not  the  storage  man 
has  done  his  duty  in  keeping  the  goods  without  waste  or 
deterioration,  another  inspection  is  necessary  upon  their 
delivery. 

(i)  Exhibition  and  Selling  of  Goods. — A  further  inci- 
dental service  performed  by  warehousemen  is  the  exhibit- 
ing and  even  the  selling  of  goods  entrusted  to  them.     A 


THE  WAREHOUSE  165 

noted  example  of  this  service  is  to  be  found  in  the  sample 
rooms  of  the  great  Bush  Terminal  warehouse  system. 

(j)  Support  of  Auctions  and  Produce  Exchanges. — 
Where  "spot"  sales  are  made  through  organized  exchanges, 
the  commodities  must  he  at  hand  for  delivery.  This  means 
that  they  must  be  in  an  available  storage  somewhere  near 
the  exchange.  They  may  be  "on  track,"  that  is,  stored 
in  a  freight  car  or  in  a  warehouse.  At  least  a  temporary 
storage  must  be  had  for  goods  to  be  sold  at  auction.  Con- 
venient to  auctions,  markets,  and  organized  exchanges  of 
all  kinds  there  will  be  found  the  necessary  warehousing 
facilities. 

(k)  Handling  Exports  and  Imports. — A  warehouse  sys- 
tem is  essential  to  every  great  port  in  the  handling  of  ex- 
ports and  imports.  Through  these  institutions  the  middle- 
men in  foreign  trade  work.  The  commission  houses  must 
have  ample  storage  facilities  in  the  home  ports  and  in  the 
foreign  ports. 

(1)  Miscellaneous  Services. — There  are  other  incidental 
services  which  the  warehouseman  performs.  He  may  col- 
lect goods  into  carload  lots  and  become  a  forwarding  agent ; 
he  may  secure  and  disseminate  market  information ;  he  may 
make  purchases  for  his  patrons.  Being  a  business  man  in 
a  competitive  industry,  the  warehouseman  is  seeking  to 
attract  business,  to  build  up  good-will.  Whatever  he  can 
do  to  secure  this  good-will,  he  is  glad  to  do. 

117.  Economic  Advantages  of  the  Warehouse. — The 
warehousing  industry  has  developed,  persists  and  thrives 
because  of  the  economic  advantages  gained  through  it.  Chief 
of  these  economic  advantages  are  the  following: 

1.  The  warehouse  aids  in  adjusting  the  supply  of  com- 
modities to  the  needs  of  the  community. 

2.  It  encourages  the  production  of  perishable  products, 
over  and  beyond  the  seasonal  demands. 

3.  It  prevents  irregularity  in  manufacturing  both  by 


1G6  MARKETING 

making  possible  a  reserve  store  of  materials  on  hand  and 
by  affording  the  basis  for  credit. 

4.  It  tends  to  smooth  out  the  production  peaks. 

5.  It  aids  in  adjusting  market  supply  during  the  sea- 
son of  surplus  and  of  scarcity. 

6.  It  offers  a  physical  support  to  competitive  and  specu- 
lative industry. 

118.  Types  of  Warehouses. — There  are  several  distinct 
types  of  warehouses,  with  common  functions  but  classified 
on  the  basis  of  the  goods  which  they  handle.  Since  the 
point  of  view  here  is  a  commercial  one,  the  storage  ware- 
house that  devotes  its  services  to  the  storing  of  household 
goods  will  not  be  discussed.  Attention  has  already  been 
called  to  the  fact  that  the  freight  car  is  a  movable  ware- 
house and  the  refrigerator  car  is  a  movable  cold  storage. 
These  need  not  be  further  discussed.  The  railroad  freight 
sheds,  the  shipping  rooms  of  manufacturing  plants  and 
wholesale  establishments,  are  temporary  warehouses.  They 
are  not,  however,  of  sufficient  importance  to  deserve  special 
attention. 

119.  The  General  Mercantile  Warehouse. — As  the 
volume  of  business  in  any  line  increases  there  is  a  tendency 
toward  specialization  in  warehousing;  but  where  there  is 
not  sufficient  business  to  justify  specialization  and,  to 
some  extent,  elsewhere  the  prevailing  type  is  the  general 
mercantile  warehouse.  It  is  a  warehouse  fitted  to  handle 
many  kinds  of  commodities  and  corresponds  to  the  general 
store.  In  such  a  warehouse  there  may  be  a  hunderd  or 
more  different  kinds  of  articles  in  storage  at  the  same 
time.  These  may  comprise  such  widely  varying  articles 
as  salt,  lime,  liquor,  tobacco  from  Turkey,  tea  from  China 
and  India,  coffee  from  Brazil,  silk  goods  and  gloves  from 
Japan,  jewels  of  an  actress,  an  Egyptian  mummy,  sugar, 
flour,  hides  and  leather,  "  spices  from  Araby,"  and  many 
others. 


THE  WAREHOUSE  167 

The  general  mercantile  warehouse  must,  therefore,  be 
adaptable  to  caring  for  many  different  kinds  of  goods. 

Some  of  them  are  perishable  and  will  deteriorate  very  easily. 
Many  of  them  cannot  be  placed  together  in  the  same  com- 
partment. There  is  also  the  question  of  the  quantity  of  light 
which  is  to  be  permitted  to  enter;  there  is  the  question  of 
humidity  of  the  atmosphere ;  there  is  the  question  of  temperature. 
There  is  also  the  problem  of  keeping  records  in  order  that  at 
an  instant's  notice  the  manager  may  report  the  amount  of  goods 
on  hand,  the  character  of  the  goods,  by  whom  sent,  and  to  whom 
they  are  to  be  delivered.  He  must  know,  also,  the  space  that 
is  available  for  storage  at  all  times.  He  must  establish  connec- 
tions so  that  the  goods  will  come  to  him  for  safe-keeping,  and 
he  must  be  ready  to  accommodate  the  merchant  who  may  ask  for 
them  at  any  time,  and  in  any  quantity.  For  all  these  sendees 
it  is  also  his  duty  to  set  a  rate  of  charge.  He  must  study  his 
business  in  its  broader  aspects  as  to  what  forces  are  at  work 
to  increase  or  decrease  his  usefulness — where  he  belongs  in  the 
scheme  of  things.  This  warehouseman,  therefore,  to  meet  all 
his  problems,  must  know  something  of  the  physical  and  chemical 
sciences,  something  of  mechanical  engineering,  something  of 
accounting,  something  of  labor  management,  and  in  addition 
he  must  be  a  merchant  of  his  services.4 

Warehousing,  so  far  as  the  general  mercantile  ware- 
house is  concerned,  develops  in  importance  with  the  growth 
of  the  trade  center.  On  a  large  scale  it  is  essentially  a  big- 
city  business.  But  everywhere  along  the  line,  from  the 
origin  of  materials  to  their  consumption,  the  general  ware- 
house performs  in  varying  degrees  the  same  functions.  Like 
the  common  carrier,  the  public  warehouses  must  in  some 
states  serve  all  who  call  upon  them  without  favor  or  dis- 
crimination. In  Illinois,  for  instance,  they  are  public  utili- 
ties and  operate  under  the  supervision  of  the  public  service 
commission.    They  protect,  they  insure,  they  bear  the  risks. 

*C.  S.  Duncan,  Commercial  Research,  p.  31. 


168  MARKETING 

They  are  as  important  to  industry  as  the  bank  and  the  rail- 
road. With  the  growth  of  industry  they  become  more  and 
more  specialized  institutions. 

120.  The  Bonded  Warehouse. — This  special  type  of 
warehouse  arises  from  the  fact  that  certain  revenue  taxes 
are  levied  by  the  state  on  goods  of  a  certain  character.  In 
general,  the  bonded  warehouse  has  to  do  with  the  import 
trade  and  is  best  exemplified  in  the  Customs  Houses.  There 
are,  however,  bonded  warehouses  for  domestic  trade.  This 
business  may  be  carried  on  in  connection  with  the  general 
mercantile  warehouse,  but  wherever  there  is  such  a  ware- 
house business,  it  is  under  the  charge  and  control  of  Gov- 
ernment agents. 

The  bulk  of  the  commodities  in  the  bonded  warehouses  has 
been  liquors.  Such  goods  could  be  put  under  license  and 
released  in  the  quantities  desired,  the  revenue  being  paid 
as  they  were  released.  The  government  allowed  eight  years 
for  dues  to  run  against  liquors.  In  this  way  the  bonded 
warehouse  becomes  the  neck  of  the  bottle  through  which 
these  goods  must  pass  and  where  they  may  be  most  readily 
controlled. 

On  the  basis  of  the  character  of  the  bonded  goods  car- 
ried, there  are  three  kinds  of  bonded  warehouses.  These 
are  distillery  warehouses,  general  bonded  warehouses,  and 
special  bonded  warehouses.  They  all  perform  the  same 
kinds  of  functions. 

121.  The  Grain  Elevator. — A  particular  type  of  ware- 
house has  developed  to  handle  the  great  grain  crops  of  the 
country.  This  type  is  called  an  elevator  because  its  con- 
struction takes  advantage  of  the  flowing  quality  of  grain. 
The  grain  is,  in  fact,  elevated  from  the  wagon,  the  car,  or 
the  hold  of  the  ship,  to  the  top  of  the  warehouse  and  is 
then  permitted  to  flow  or  is  carried  on  broad  rubber  belts 
to  the  storage  bins. 

There  are  several  different  types  of  grain  warehouses. 


THE  WAREHOUSE  169 

The  grain  grower  has  his  crib  or  bin  for  storing  sufficient 
quantity  for  feeding  and  seeding  purposes,  at  least,  and 
often  for  holding  back  the  supply  for  a  better  price.  At 
the  local,  or  country,  markets  are  the  small  elevators,  fre- 
quently connected  with  a  local  flour  mill,  and  the  grain 
warehouses  that  are  used  for  a  brief  period  to  handle  a  share 
of  the  local  crop  on  a  commission  basis,  to  be  devoted  at 
other  times  to  housing  wool,  potatoes,  and  so  forth. 

There  may  be  also  at  important  local  markets  the  farm- 
ers' elevator,  run  on  a  cooperative  basis  by  the  grain  grow- 
ers themselves.  In  this  case  the  producers  are  absorbing 
the  functions  of  middlemen.  As  is  well  known,  this  move- 
ment for  farmers'  elevators  began  in  the  Granger  move- 
ment during  the  '70 's,  when  the  grain  growers  banded  to- 
gether to  fight  the  railroads  with  their  elevator  lines.  A 
combination  of  control  of  transportation  and  storage  shut 
the  growers  out  from  the  markets.  Railroads  were  then 
declared  to  be  public  utilities,  and  later  in  certain  grain- 
growing  states  the  elevators  were  also  declared  to  be  public 
utilities.  The  farmers'  elevators  then  sprang  up  and  have 
in  recent  years  made  heavy  inroads  into  the  grain-storage 
business. 

The  so-called  "line"  elevators  were  built  along  the  line 
of  a  railroad  system  tapping  the  grain-producing  areas. 
These  elevators  led  into  the  terminal  elevators  at  the  large 
market  centers.  Here  they  entered  into  competition  with 
the  elevator  men  already  in  business.  The  control  of  the 
line  elevators  was  so  great,  however,  that  by  1896  the 
independents  were  practically  frozen  out,  in  Chicago,  for 
example.  In  consequence,  the  flood  of  grain  was  divided, 
some  flowing  past  this  center,  some  being  diverted  to  the 
north  through  Duluth,  some  being  carried  on  to  the  Atlantic 
coast  by  the  great  trunk  lines. 

The  power  of  the  "line"  elevators  has  since  been  broken 
and  the  farmers'  elevators  have  rapidly  developed,  while 


170  MARKETING 

the  independents  have  almost  held  their  own.  At  first  the 
grain  elevator  business  in  the  local,  the  primary,  and  the 
terminal  market  was  done  by  independent  elevatormen. 
Usually  it  was  in  connection  with  the  commission  business. 
The  relative  position  of  the  three  main  types  is  shown  by 
the  following  figures  for  Minnesota : 


Kind 

Number 

1906 

1910 

1196 
381 
151 

871 
363 
224 

In  1913,  there  were  over  two  thousand  cooperative  eleva- 
tors in  the  United  States,  which  handled  40  per  cent  of 
the  crop. 

Storage  is  a  strategic  function  in  marketing  grain.  ' '  The 
key  to  a  proper  comprehension  of  the  primary  market  in 
the  grain  distribution  lies  not  in  the  railway  systems  nor 
in  the  local  elevator  systems,  but  in  the  control  and  opera- 
tion of  the  terminal  elevator  systems.  These  elevators  are 
the  receiving  and  storing  places  for  the  grain  gathered  into 
primary  markets  through  the  local  line  elevators. ' ' 5  The 
grain  elevator  serves  not  only  to  store  the  grain  and  to 
transfer  it,  but  also  to  clean  and  to  mix  it.  Herein  lies  one 
of  the  abuses,  as  will  appear  in  the  discussion  of  grading. 

It  is  possible  in  certain  sections  of  the  country  for  grain 
to  reach  the  primary  or  terminal  market  without  passing 
through  an  elevator.  This  is  true  in  the  West  where  wheat, 
for  instance,  when  it  is  threshed,  is  piled  up  in  the  fields 
in  sacks,  until  the  time  when  it  can  be  shipped.  In  the 
marketing  of  corn  throughout  the  corn  belt,  the  local  cribs 
that  used  to  line  the  sidetracks  at  every  small  station, 

■Report  of  the  Industrial  Commission,  1900,  vol.  vii,  p.  70. 


THE  WAREHOUSE  171 

built  to  carry  the  crop  locally,  so  as  not  to  flood  the  central 
markets,  have  disappeared.  The  vast  bulk  of  this  cereal 
crop  is  now  swallowed  up  in  the  elevators  of  the  larger 
markets.  The  big  flour  mills  have  built  their  own  eleva- 
tors, as  have  many  of  the  malting  and  corn-products  con- 
cerns. 

One  unique  characteristic  of  grain  storage  is  worth  dis- 
cussion. Wheat,  as  well  as  most  other  grain,  loses  its  iden- 
tity when  it  passes  into  the  elevator.  When  the  farmer 
hauls  his  grain  to  the  local  elevator  it  is  run  into  a  bin 
with  that  of  many  other  producers.  As  it  is  drawn  out 
there  is  no  means  of  knowing  when  any  particular  lot  may 
be  run  out.  This  kind  of  "commingling"  continues 
throughout  the  marketing  process.  "The  flour  in  a  loaf 
of  bread  may  come  from  many  wheat  fields." 

122.  Cotton  Warehouses. — Attention  has  been  called  to 
the  marked  tendency  toward  a  one-crop  system  in  the  cot- 
ton-producing region.  This  tendency  has  created  an  im- 
portant financing  problem,  for  the  cotton  grower  must  be 
carried  throughout  the  entire  year,  although  his  one  big 
crop  is  marketed  practically  between  August  and  Novem- 
ber. The  grower  has  been  obliged  to  draw  against  his 
cotton  both  while  growing  and  after  picking.  "In  the 
light  of  all  the  facts,  it  seems  reasonable  to  state  that  but 
little  cotton  would  be  stored  or  insured  if  it  were  not  neces- 
sary to  do  so  in  order  to  negotiate  loans  with  cotton  as 
collateral.  The  banks  are  entirely  willing  to  advance  money 
on  cotton  on  liberal  terms  when  it  is  properly  stored  and 
insured."  8 

It  is  clear,  therefore,  that  a  well-organized  system  of 
cotton  warehouses  would  be  a  great  assistance  to  all  con- 
cerned in  the  marketing  of  this  great  staple  product.  But 
financing  is  only  one  of  the  functions.     There  is  much 

•U.  S.  Department  of  Agriculture,  Bulletin  No.  216,  "Cotton  Ware- 
houses," p.  2. 


172  MARKETING 

waste  in  the  careless  methods  of  handling  cotton.  It  is  not 
always  protected  from  the  weather  on  the  plantation  and 
it  is  not  always  baled  in  such  a  way  as  to  protect  it.  Cot- 
ton is  neglected  more  than  any  other  product. 

There  are  different  types  of  cotton  warehouses.  As  in 
marketing  wheat,  cotton  may  be  stored  locally,  at  the  con- 
centration points,  in  the  terminal  markets  or  by  the  mills. 
It  has  been  calculated  for  1913  that  the  3,485  cotton  ware- 
houses had  a  capacity  of  13,742,680  "running"  bales  and 
that  the  cotton  mills,  823  in  number,  had  a  capacity  of 
1,295,495  "running"  bales,  making  altogether  a  total 
capacity  of  15,038,175  bales.  In  this  same  year  the  total 
production  was  only  13,982,811  bales.  These  figures  show 
that  there  was  in  existence  sufficient  storage  capacity  to 
more  than  accommodate  at  one  time  the  entire  crop. 

The  warehousing  system  has  not  been  well  adjusted  to 
the  needs  of  marketing  cotton.  "In  storage  capacity  the 
present  cotton  warehouses  are  ample,  but  these  warehouses 
are  poorly  distributed.  The  best  warehouses  are  not  avail- 
able to  the  farmer.  The  charges  of  the  others  are  too  high 
because  they  must  pay  a  high  insurance  rate  and  the  cost 
of  handling  is  necessarily  great.  Some  new  standard  build- 
ings should  be  erected,  but  many  of  those  now  in  use  should 
be  remodeled. ' ' 7 

The  cotton  crop  is  harvested  in  three  or  four  months, 
while  it  requires  at  least  the  twelve  months  for  the  mills 
to  consume  it.  An  adequate  storage  system  is  therefore 
absolutely  essential  to  keep  the  crop  from  flooding  the 
market  and  depressing  the  price  unduly.  Even  though  the 
growers  sell  it,  there  must  somewhere  be  sufficient  storage 
space.  For  the  material  welfare  of  the  cotton  producer 
the  storage  system  should  be  available  to  him.  When  the 
cotton  leaves  his  hands,  it  then  becomes  an  open  question 
whether  the  mills  should  have  storage  space  or  whether  a 
'Ibid.,  p.  25. 


THE  WAREHOUSE  173 

special  middleman  class  should  be  maintained  for  this  pur- 
pose. "The  inauguration  of  an  ample  and  efficient  system 
of  warehouses  would  mark  the  beginning  of  a  progressive 
revolution  in  the  cotton  markets."  8  It  has  been  estimated 
that  there  is  in  normal  years  a  loss  of  from  $30,000,000  to 
$75,000,000  worth  of  cotton  from  "country  damage." 

There  are  six  kinds  of  cotton  warehouses,  judged  on  the 
basis  of  the  progress  of  cotton  from  the  field  to  the  mill: 
(1)  on  the  farm,  (2)  at  the  gin,  (3)  at  the  concentration 
point,  (4)  at  the  port  of  export,  (5)  at  the  port  of  import, 
(6)  at  the  mill.  To  attract  cotton  to  New  Orleans  there 
has  been  built  as  a  municipal  enterprise  a  great  modern 
cotton  warehouse,  with  all  the  up-to-date  equipment.  In 
consequence,  ' '  there  is  more  handling  machinery  employed, 
better  shed  facilities  and  capacity  furnished,  greater  length 
of  dock  frontage  available  on  a  deep  channel  in  proportion 
to  import  and  export  tonnage,  in  the  Port  of  New  Orleans 
than  in  any  other  American  or  foreign  port  examined."9 

As  was  true  with  wheat,  there  must  be  ample  warehous- 
ing room  in  connection  with  cotton  exchanges  to  care  for  all 
the  "spot"  sales  that  may  take  place.  The  amount  of  cot- 
ton passing  through  the  New  York  exchange  is  not  great, 
and  no  extensive  storage  space  is  demanded. 

123.  Wool  Warehouses. — There  is  no  great  central  mar- 
ket in  the  United  States  for  wool.  Attempts  have  been 
made  at  times  to  organize  such  a  market  as  exists  in 
Loudon.  In  1894,  the  New  York  Wool  Exchange  was  or- 
ganized, but  it  did  not  succeed.  Wool-marketing  methods 
would  not  adjust  themselves  to  it.  More  recently  ware- 
houses have  been  built  at  local  concentration  points,  where 
the  wool  may  be  graded  and  sold  at  auction. 

Attempts  have  also  been  made  to  establish  wool  ware- 
houses at  large  primary  markets,   such  as   Chicago   and 

8  U.  S.  Department  of  Agriculture,  Bulletin  No.  277,  p.  5. 

9  Von  Phul,  Physical  Cliaractcristics  of  Cotton  Warehouses,  p.  5. 


174  MAKKETING 

Omaha.  Some  of  these  have  been  successful ;  some  have  not. 
It  has  not  been  possible  to  make  these  cities  into  wool- 
trading  centers.  One  warehouse  lost  $50,000  in  an  attempt 
and  then  concluded  it  was  an  illogical  plan.  They  can 
serve,  however,  as  assembling  and  transfer  points. 

The  most  important  warehouses  are  at  the  "terminal 
markets, ' '  and  especially  in  Boston  and  Philadelphia.  One 
warehouse  in  the  former  city  has  a  storage  capacity  of  more 
than  100,000,000  pounds.  It  is  in  connection  with  these 
warehouses  that  the  wool  merchants  function.  They  serve 
as  the  wholesale  wool  store  for  the  New  England  manufac- 
turers. To  them  the  manufacturers  can  come  at  any  time 
and  secure  the  amount  and  the  grade  of  wool  required.10 
These  warehousemen  are  generally  spoken  of  as  commission 
men. 

124.  Tobacco  Warehouses. — Tobacco  is  stored  imme- 
diately upon  cutting  in  "barns"  where  it  is  cured.  It  is 
then  hauled  to  the  local  market  where  it  is  put  into  local 
warehouses.  These  often  have  a  large  open  floor  where  the 
tobacco  auction  may  be  held.  From  these  local  markets 
it  is  consigned  to  commission  merchants  or  warehousemen 
in  the  large  nearby  centers,  such  as  Baltimore,  Louisville, 
and  Cincinnati.  Often  six  months,  a  year,  or  two  years 
elapse  after  the  tobacco  has  been  sold  by  the  producers 
before  it  is  manufactured.  During  this  period,  it  must  be 
protected  and  insured.  "The  length  of  time  tobacco  may 
remain  in  storage  in  the  hands  of  dealers  and  speculators 
is  entirely  problematical  and  would  depend  largely  on  mar- 
ket conditions,  but  would  not  generally  be  for  more  than  a 
year  or  two.  The  more  important  storage  centers  for  leaf 
tobacco  are  Louisville,  Cincinnati,  St.  Louis,  Richmond, 
Baltimore,  Durham,  and  Danville."11 

10  Cf.  Cherington,  The  Wool  Industry,  pp.  66-72. 
11 U.  S.  Department  of  Agriculture,  Eeport  No.  98t  "Systems  of 
Marketing  Farm  Products,"  p.  160. 


THE  WAREHOUSE  175 

Like  wool,  tobacco  is  sold  on  inspection  or  by  special 
samples.  An  auction  or  sales  room  is,  therefore,  a  necessary 
appendage  to  a  tobacco  warehouse.  Here,  too,  grading,  even 
though  crudely  done,  takes  place.  Many  of  the  middleman 
functions  are  thus  concentrated  in  the  hands  of  the  ware- 
houseman. The  tobacco  warehouse  may  become  as  strategic 
a  point  in  marketing  as  the  wool  warehouse. 

125.  Cold  Storage. — One  of  the  great  modern  discoveries 
is  the  method  of  preserving  perishable  foodstuffs.  It  has 
not  only  relieved  the  world  forever  from  the  fear  of  actual 
famine,  but  also  has  made  possible  the  enjoyment  of  many 
exotic  delicacies.  The  cold  storage  warehouse  has  the  duty 
both  to  protect  and  to  preserve  the  goods  that  it  receives. 
Storing  of  this  kind  becomes  a  technical  problem ;  the  ware- 
houseman becomes  a  scientist. 

Cold  storage  is  a  great  and  growing  business. 

It  is  difficult  to  estimate  the  extent  of  the  cold-storage  in- 
dustry. The  best  figures  obtainable  indicate  that  there  are 
between  700  and  800  public  cold  storage  warehouses  in  this 
country,  aggregating  approximately  200,000,000  cubic  feet  of 
space.  About  1,320,000  carloads  of  perishable  products  pass 
through  the  warehouses  in  the  course  of  a  year,  valued  at 
approximately  $600,000,000.  These  figures  do  not  include  the 
fresh  meat  which  is  refrigerated  in  the  packing  houses  and 
public  markets,  and  which  amounts  to  16,000,000  pounds  yearly. 
We  have  no  figures  concerning  either  the  space  or  the  products 
stored  in  private  houses,  of  which  there  are  probably  2,000.12 

Cold  storage,  in  one  form  or  another,  extends  from  the 
source  of  perishable  products  to  their  consumption.  Fruits 
and  vegetables  may  be  canned  or  "banked"  by  the  house- 
wife, or  kept  in  the  cellar  on  the  farm;  and  they  may  be 
preserved  in  the  ice  chest  by  the  consumer.     All  the  way 

13  M.  E.  Pennington,  Annals  of  the  American  Academy  of  Political 
and  Social  Science,  vol.  xlviii,  p.  159. 


176  MARKETING 

along  between  these  two  there  must  be  protection  and  pres- 
ervation. The  carrier  has  his  refrigerator  car,  or  ship,  or 
truck.  Perishable  products  are  thus  carried  to  all  the  chief 
markets  of  the  world ;  chilled  beef  from  the  United  States 
and  Argentina  to  Europe ;  bananas  from  the  tropics  to 
all  parts  of  the  temperate  zone ;  fresh  fruits  from  the  West 
and  South  to  the  Eastern  and  Northern  cities,  from  the 
Mediterranean  region  to  far-flung  market  centers.  And 
in  those  market  centers  there  are  the  great  cold-storage 
plants.  What  other  types  of  warehouses  do  for  other  com- 
modities the  cold  storages  do  for  perishable  products,  for 
fruit,  vegetables,  eggs,  butter,  meats,  etc.  They  are  essen- 
tial in  the  distribution  of  the  supply  throughout  the  year 
and  geographically. 

In  the  marketing  of  perishable  products  the  cold-storage 
warehouses  are  strategic.  They  collect  the  surplus  supply 
during  the  height  of  production  and  distribute  it  during  the 
period  of  deficiency.  In  this  period  of  deficiency  the  mar- 
ket must  look  to  the  cold-storage  men  and  the  ' '  commission 
men"  for  the  supply.  These  men  have,  therefore,  been 
accused  of  manipulating  the  market.  In  fact,  two  com- 
plaints have  been  made  against  them:  (1)  that  they  have 
filled  their  storage  houses  with  products  bought  on  a  glutted 
market  and  have  unduly  increased  the  price  in  the 
slack  season;  and  (2)  that  they  have  put  deteriorated  goods 
on  the  market. 

As  regards  the  first  complaint,  the  theory  is  that,  "if  a 
portion  of  a  product  is  withdrawn  from  consumption  at  a 
time  of  the  year  when  production  is  relatively  large  and  re- 
leased for  consumption  when  production  is  relatively  small 
the  result  is  that  the  prices  will  be  raised  during  the  period 
of  natural  surplus  and  depressed  during  the  period  of  nat- 
ural scarcity,  so  that  there  will  be  in  operation  an  equalizing 
force."13   It  was  found  by  investigation,  in  1912,  that  this 

"Holmes,  Cold  Storage:  Business  Features,  p.  68. 


THE  WAREHOUSE  177 

contention  made  by  cold-storage  men  that  a  tendency  to- 
ward uniformity  of  prices  exists  is  largely  true,  but  is  not 
true  for  all  commodities  going  into  storage.  The  effect  upon 
price  will  vary  largely  in  proportion  to  the  relative  amount 
that  goes  into  storage.  It  has  been  calculated  that  3.1  per 
cent  of  the  year's  production  of  fresh  beef,  4.1  per  cent 
of  mutton,  11.5  per  cent  of  pork,  9.6  per  cent  of  butter, 
and  15  per  cent  of  eggs,  go  into  storage.  On  November  16, 
1917,  the  holdings  of  275  cold  storages  were  reported  as 
46,206,059  pounds  of  frozen  poultry.  Eeports  from  266 
cold  storages  for  July  15,  1918,  showed  holdings  of  65,874,- 
378  pounds.  In  all  of  these  products,  Government  investi- 
gation has  shown  that  practically  the  entire  receipts  are 
exhausted  within  ten  months.  On  February  1,  1916,  there 
were  in  416  cold  storages  4,363,686  barrels  of  apples. 

Statistics  show  clearly  that  on  the  whole  the  price  line 
is  leveled  out  by  cold  storage.  It  is  to  be  remembered,  how- 
ever, that  the  holding  of  this  reserve  supply  ready  to  be  let 
loose  upon  the  market,  gives  to  those  who  control  it  a  tre- 
mendous advantage  in  case  of  disaster  or  misfortune  to  the 
new  crop.  The  strategic  time  in  the  storage  business  is  the 
period  just  preceding  the  advent  of  a  new  crop.  Storage 
charges  are  running  against  the  goods;  most  kinds  cannot 
be  held  over  successfully  for  the  second  season;  the  ideal 
is  to  clear  out  the  stocks  just  in  time  to  care  for  the  new 
supply.  It  is  a  matter  for  nice  judgment;  it  is  a  matter 
for  speculation,  if  it  does  not  degenerate  into  pure  gam- 
bling. If  a  substantial  portion  of  the  existing  supply  is 
destroyed  or  if  the  new  season  opens  late,  those  who  control 
the  remaining  supply  find  a  seller's  market.  If  the  supply 
is  underestimated,  it  may  become  a  buyers '  market.  Social 
control  alone  can  protect  the  public  against  profiteering. 

As  to  the  deterioration  of  the  products,  there  has  been  a 
basis  for  complaint.  But  every  business  must  fight  its  way 
up  to  better  methods.     The  cold-storage  business  has  done 


178  MARKETING 

this  in  a  most  worthy  manner.  The  following  may  be  taken 
as  a  fair  judgment  on  the  situation :  ' '  Current  opinion 
holds  that  cold-storage  warehouses  are  dirty,  unsanitary 
places.  The  fact  of  the  case  is  that  they  are,  almost  with- 
out exception,  far  cleaner  than  the  butchers'  icebox,  and 
infinitely  ahead  of  the  house  refrigerator,  as  commonly 
kept  by  the  present-day  servant."  14 

Cold  storage  has  developed  into  a  new  science.  From  a 
crude  beginning,  refrigerating  and  chilling  methods  have 
steadily  improved.  A  refrigerator  car  was  placed  in  serv- 
ice in  1868.  Boston  received  a  consignment  of  dressed  beef 
in  September,  1869.  The  refrigerating  system,  both  on 
the  railroads  and  in  warehouses,  centered  in  Chicago,  which 
is  to-day  the  chief  cold-storage  center  in  the  United  States. 
In  many  instances  the  refrigerating  material  is  ice,  but 
the  modern  refrigerated  warehouse  uses  no  ice.  In  them 
refrigeration  is  obtained  by  piping  a  calcium  chloride  brine 
or  liquid  ammonia.  The  temperature  can  be  nicely  ad- 
justed to  obtain  the  required  results.  To-day,  the  most  im- 
portant consideration  is  to  get  the  perishable  products  into 
the  storage  before  they  begin  to  decay. 

There  is  no  doubt  that  cold  storage  is  the  most  important 
single  factor  to-day  in  the  conservation  of  foodstuffs.  The 
system  so  beneficent  when  rightly  used  should  not  be  per. 
mitted  to  have  its  power  abused.  Cold-storage  goods  must 
not  be  sold  as  "fresh"  goods.  Eegulations  are  rightly 
made  to  compel  the  labeling  of  such  goods.  The  tendency  is 
more  and  more  to  consider  the  cold  storage  as  a  public 
utility. 

126.  Stockrooms. — Another  feature  of  warehousing  is 
the  carrying  of  supplies  of  raw  materials  and  stocks  of 
goods.  The  question  here  is  whether  the  individual  busi- 
ness shall  perform  these  services  for  itself  or  turn  them 

14  Pennington,  Annals  of  the  American  Academy  of  Political  and 
Social  Science,  vol.  viii,  p.  156. 


THE  WAREHOUSE  179 

over  to  the  specialized  middlemen.  The  larger  firms  carry 
their  own  supplies  and  stocks.  This  applies  to  merchants 
as  well  as  manufacturers.  A  large  department  store  has 
devoted  a  large  loft-room  space  to  the  storage  of  furs; 
most  large  retailers  have  their  neighboring  warehouses. 
The  Standard  Oil  Company  has  built  its  own  oil  tanks.  The 
International  Harvester  Company  has  built  several  large 
warehouses.  One  recently  constructed  in  Chicago  will  per- 
mit the  storage  of  1,500  carloads  of  goods.  It  has  3,723,527 
cubic  feet  of  space. 

The  requirements  of  each  individual  business  will  de- 
termine the  warehousing  service.  A  mail-order  house  will 
need  to  have  a  reserve  stock  to  meet  its  needs.  A  depart- 
ment store  will  have  its  storage  problem ;  each  manufactur- 
ing plant  will  meet  the  same  problem.  Some  kind  of  storage 
will  in  every  instance  be  necessary. 

127.  Warehousing  Problems. — There  are  three  general 
types  of  problems  that  a  warehouseman  must  face:  (1) 
mechanical,  (2)  commercial,  (3)  legal.  The  mechanical 
problems  have  to  do  with  the  size  of  structure,  the  material 
and  the  equipment.  Rooms  have  a  certain  most  efficient 
size  and  shape.  The  heat,  moisture,  and  light  must  be  regu- 
lated. The  strain  of  the  load  must  be  cared  for ;  mechani- 
cal devices  are  needed  for  handling  heavy  articles,  for 
lifting  and  lowering  them. 

The  commercial  problems  of  a  warehouseman  have  to  do 
with  an  efficient  performance  of  his  functions.  He  must 
select  an  economical  location,  where  rent  is  reasonable, 
where  transportation  is  available,  where  insurance  risks 
are  low,  and  where  contact  may  be  had  with  patrons.  In 
other  words,  the  warehouseman  must  meet  competition  and 
must  sell  his  services  as  a  merchant  sells  his  wares. 

The  relation  of  a  warehouseman  to  his  patrons  is  con- 
tractual. This  contract  originates  in  the  acceptance  of  the 
goods  for  storage  and  in  the  warehouse  receipt.     Under 


180  MARKETING 

these  conditions  the  obligation  of  the  storage  man  is  to 
receive  and  store  the  goods,  to  exercise  ordinary  care  in 
keeping  them  safely,  to  afford  the  depositor  ready  access 
to  the  goods,  to  deliver  the  goods  in  accordance  with  the 
contract  and  provisions  of  the  law,  and  to  undertake  such 
additional  responsibilities  as  are  created  by  special  con- 
tract. The  care  required  is  such  as  a  reasonably  careful 
owner  of  similar  goods  would  exercise.  A  warehouseman 
is  not  responsible  for  losses  due  to  an  act  of  God,  to  a 
public  enemy,  to  defects  inherent  in  the  goods  stored,  or 
to  other  causes  not  due  to  neglect. 

The  identity  of  some  goods  must  be  maintained,  but  not 
of  others.  The  latter  are  fungible  goods,  where  the  units 
are  so  alike  as  to  become  interchangeable,  such  as  grain  and 
cotton.  The  former  are  non-fungible  goods.  A  warehouse- 
man has  a  lien  against  the  goods  in  his  care  for  storage 
charges  only,  and  then  but  from  the  date  of  receipt.  Other 
charges  must  be  stipulated,  for  interest,  insurance,  trans- 
portation, weighing,  etc.  These  are  enforceable  against  all 
goods.  But  the  right  is  lost  by  the  surrender  of  the  ware- 
house receipt. 

128.  Place  of  Warehouse  in  Commercial  Organization. — 
The  preceding  discussion  demonstrates  the  fact  that  the 
warehouse  is  as  important  in  modern  trade  as  the  railroad 
or  the  bank.  Indeed,  the  warehouse  is  to  storable  com- 
modities what  the  bank  is  to  money.  It  is  a  safe  depository ; 
it  carries  a  reserve  to  guard  against  want  and  famine.  "The 
inflow  and  the  outflow  of  the  volume  of  storage  business 
is  one  of  the  best  indexes  of  the  degree  of  business  pros- 
perity." So  essential  for  the  general  welfare  is  the  proper 
functioning  of  the  warehouse  system  that  special  laws 
have  been  passed  to  regulate  it,  as  is  true  of  public  utilities 
and  banks.15    It  is  a  materialization  of  the  spirit  of  thrift 

UC/.  U.  S.  Warehouse  Act,  August  11,  1916.  The  Cotton  Futures 
Act.  etc. 


THE  WAREHOUSE  181 

and  foresight  among  a  people.  "The  normal  place  of  ware- 
housing in  our  economic  system  seems  to  be  determined  by 
these  four  relationships — with  the  transporter,  with  the 
merchant,  with  the  manufacturer,  and  with  the  banker." 

Suggestions  for  Study 

The  student  should  now  study  the  warehouse  in  relation 
to  his  chosen  commodity.  The  classroom  work  may  be 
based  upon  the  following  topics: 

1.  Tidal  movements  of  stored  goods. 

2.  Effective  reserve  of  goods. 

3.  Location  problem  of  a  warehouse. 

4.  Scientific  aspects  of  warehousing. 

5.  Control  of  warehousing. 

6.  Percentage  of  total  supply  in  storage. 

7.  Control  of  goods  in  storage. 

8.  Social  problem  in  cold  storage. 

9.  Historical  development  of  warehousing. 
10.  Warehousing  in  relation  to  middlemen. 

Readings  : 

U.  S.  Department  of  Commerce  and  Labor,  Bureau  of 
Statistics,  "Warehousing  Industry  in  the  U.  S.,"  pp. 
1033-97,  October,  1903. 

Report  of  Industrial  Commission,  1900,  vol.  vi,  pp.  15, 
60-62,  64,  66-68. 

U.  S.  Department  of  Agriculture,  Bulletin  216,  "U.  S.  Ware- 
house Act." 

Weld,  Marketing  Farm  Products,  pp.  142-73. 

Annals  of  the  American  Academy  of  Social  and  Political 
Science,  November,  1913,  pp.  44-56. 

Report,  Massachusetts  Committee  on  Cost  of  Living,  1910, 
pp.  175-88. 

Pennington,  "Chemical  Aspects  of  Cold  Storage,"  Annals  of 
the  American  Academy  of  Social  and  Political  Science, 
vol.  xlviii. 


182  MARKETING 

Journal  of  Political  Economy,  April,  1915,  pp.  375-80. 

U.  S.  Department  of  Agriculture,  Circular  No.  64,  "U.  S. 
Cotton  Futures  Act  of  August  11,  1916." 

Bulletin  No.  277,  "Cotton  Warehouse  Construction." 

Bulletin  No.  520,  "System  of  Accounts  for  Cotton  Ware- 
bouses." 

Bulletin   No.   811,   "System   of   Bookkeeping   for   Grain 

Elevators." 

Bulletin  No.  216,  "Cotton  vTarehouses." 

Von  Phul,  Physical  Characteristics  of  Cotton  Warehouses. 

Mechanical  Equipment  used  at  Port  of  New  Orleans. 

Trelease,  "Some  Structural  Features  of  Cotton  Warehouses" 
(pamphlet). 

State  Public  Utilities  Commission  of  Illinois,  "Conference 
Ruling  No.  12,"  July  2,  1911. 

Fortney,  Warehousing  Industry  in  the  United  States. 

Adams,  Marketing  of  Perishable  Products,  pp.  165-7. 

Weist,  Butter  Industry,  p.  151. 

Miller,  Cotton  Trade  Guide,  pp.  421-4. 

Bulletins  American  Warehouseman's  Association. 

Holmes,  Cold  Storage  Business  Features. 

Cold  Storage  and  Prices. 

U.  S.  Department  of  Agriculture,  Bulletin  No.  801,  "Con- 
struction and  Fire  Protection  of  Cotton  Warehouses." 


CHAPTER  IX 

COMMERCIAL  GRADING  OF  COMMODITIES 

129.  The  Need  of  Uniform  Standards. — Commercial 
dealings  in  goods  of  every  character  demand  some  sort  of 
a  unit  as  a  basis.  Money  is  used  as  a  medium  of  exchange 
because  it  has  become  a  common  standard  of  value,  a  uni- 
versally applicable  measuring  rod.  Men  think  of  economic 
goods  in  terms  of  quantity  or  quality  and  unless  these 
terms  are  the  same  the  parties  to  a  trade  can  have  no  meet- 
ing of  minds.  Practically,  there  are  no  goods  on  the  market 
that  do  not  run  on  some  standard  or  grade. 

"There  are,  in  general,  two  classes  of  units  that  may  be 
used.  There  is,  first,  the  unit  of  individual  things.  This 
is  determined  by  counting  the  actual  number  of  individual 
things  in  a  group.  There  are,  for  example,  so  many  bush- 
els of  grain,  so  many  yards  of  cloth,  so  many  dollars  in 
money,  or  so  many  pounds  in  weight.  The  other  kind  of 
unit  is  called  the  measurable  unit  and  is  to  be  applied  to 
the  quantity  without  regard  to  the  individuality.  There  is, 
for  example,  the  length  or  the  capacity  of  a  container. ' ' 1 
It  is  clear  that  a  mere  number  applied  to  a  commodity  will 
mean  nothing  in  commerce  unless  the  units  so  numbered 
are  understood.  Many  of  our  commercial  units  are  ar- 
bitrary and  the  result  of  accepted  convention.  In  the 
United  States  men  speak  of  the  foot,  the  yard,  the  mile ;  in 
Europe  many  people  use  meters  and  kilometers.  Pounds 
may  be  used  here;  kilograms  there.     In  this  regard,  how- 

1  C.  S.  Duncan,  Commercial  Eesearch,  p.  19. 

183 


184  MARKETING 

ever,  the  kind  of  unit  does  not  matter  greatly  if  only  it  be 
serviceable  and  understood. 

In  order  that  commodities  may  be  classified  on  the  basis 
of  some  unit  there  is  need  of  inspection,  of  weighing,  of 
sampling,  or  of  some  other  method  of  establishing  a  grade. 
The  purpose  of  the  whole  process  is  standardization,  and 
the  object  of  standardization  is  to  be  able  to  deal  with 
commodities  in  the  mass. 

130.  Commercial  Function  of  Grading. — In  marketing 
there  has  been  a  constantly  increasing  need  for  standard 
grades.  This  demand  has  developed  with  the  growth  and 
widening  of  markets.  "When  the  bulk  of  transactions  takes 
place  in  goods  not  seen  by  both  parties,  some  kind  of 
grades  are  essential.  "Long  range"  selling  of  every  kind 
would  become  a  pure  gamble  otherwise.  Money  is  a  uni- 
versally acceptable  commodity  because  it  is  based  upon  a 
common,  known,  and  rigidly  enforced  standard.  Every  one 
can  know  what  he  is  getting.  Commercial  grading  of  goods 
is  necessary  in  order  that  the  buyer  at  long  range  may 
know  what  he  is  getting. 

If  one  is  able  to  deal  with  commodities  in  the  mass  rather 
than  individually,  sales  may  then  be  on  the  basis  of  sam- 
ples. The  selling  by  sample  saves  the  expense,  time,  and 
trouble  of  inspecting  each  unit.  In  raw  materials  and 
foodstuffs,  however,  some  one  must  at  some  time  make  an 
inspection  of  each  unit.  Nature  works  according  to  laws, 
but  the  natural  resources  are  not  found  standardized.  Here- 
in lies  a  fundamental  difference  between  raw  materials 
and  foodstuffs,  and  manufactured  goods.  With  stand- 
ardized materials  a  machine  process  of  manufacture  may 
be  started  that  will  produce  any  number  of  units  "just 
alike."  The  constant  problem  of  standardization  exists  in 
the  materials. 

By  proper  grading  it  may  become  possible  also  to  sell  by 
description.    This  is  true  to-day  of  goods  sold  through  ad- 


COMMERCIAL  GRADING  OF  COMMODITIES  185 

vertising.  A  great  amount  of  time  and  expense  could  be 
saved  if  sales  could  be  made  satisfactorily  on  the  basis  of 
description. 

Of  more  importance  is  the  relation  of  grading  to  future 
contracts.  It  would  be  impossible  for  organized  exchanges 
to  deal  in  "futures"  without  a  thorough  grading  system. 
In  fact,  difficulty  has  arisen  recently  both  on  the  grain  ex- 
changes and  on  the  cotton  exchanges  in  regard  to  stand- 
ards and  methods  of  grading.  Every  commodity  that  can 
run  satisfactorily  on  standard  grades,  can  be  traded  in  on 
the  exchange. 

In  the  local  market,  where  commodities  are  small  in 
quantity  and  it  is  not  difficult  to  inspect  each  consign- 
ment, grading  is  not  of  so  great  importance  as  elsewhere. 
Nevertheless,  even  there  grades  will  be  found,  even  though 
goods  are  traded  in  by  guess.  Scales  are  used  now  practi- 
cally everywhere  to  establish  the  standard  pound;  yard- 
sticks are  used  instead  of  measuring  from  tip  of  nose  to 
elbow;  eggs  are  sold  by  "count";  coal  by  the  ton;  grain 
by  the  bushel;  wood  by  the  cord;  hay  by  the  "load"  or 
the  ton.  Rough  and  ready  standards  may  be  used,  but 
units  of  some  sort  are  essential.  Even  in  the  local  market 
much  in  the  way  of  improvement  needs  to  be  done.  Wheat 
has  graded  higher  on  the  average  in  the  primary  market 
than  in  the  local  markets.  This  is  an  injustice  to  the  pro- 
ducer. An  improved  grading  system  would  be  of  special 
value  to  the  producer  of  farm  products. 

Take  the  case  of  cotton.  Producers  have  been  compelled 
to  sell  practically  all  of  their  cotton  on  the  "middling" 
grade  or  lower.  "For  his  best  cotton  he  (the  producer) 
may  get  'strict  middling,'  but  rarely  anything  higher. 
Experience  soon  gives  the  "buyer  a  knowledge  of  grade 
and  staple,  which  the  grower  can  never  acquire  in  equal 
detail.  The  latter  is  practically  compelled  to  sell  his 
product  on  a  quality  basis  specified  by  the  person  who 


186  MARKETING 

is  purchasing  it.  The  farmer  must  either  know  more  about 
grade  and  staple,  or  he,  collectively  as  a  community,  must 
have  some  one  in  his  employ  who  will  put  him  in  a  position 
to  trade  as  other  people  trade  in  their  products."2 

The  situation  holds  true,  to  a  greater  or  less  extent, 
for  all  commodities.  A  theoretically  fair  bargain  assumes 
an  equal  knowledge  of  grades  on  each  side. 

In  the  broader  market,  grading  becomes  even  more 
essential.  The  primary  market,  the  wholesale  trade,  the 
national  and  international  markets  are  moving  toward 
scientific  grading  of  all  commodities.  Goods  must  be 
bought  and  sold  here  by  grade,  by  sample,  by  description. 

The  consumer  is  likewise  interested  in  grading.  Stand- 
ardization may  be  the  consumer's  safeguard;  it  may  also 
weaken  his  defense.  When  goods  run  on  grades,  the  con- 
sumer has  a  background  of  experience  upon  which  to  form 
his  judgment  in  making  purchases.  On  the  other  hand, 
he  may  come  to  rely  upon  standards  and  grades  and  lose 
his  power  of  discrimination.  Under  a  system  of  caveat 
emptor,  the  buyer  can  beware  only  when  he  is  trained  in 
defense.  Higgling  in  the  market  trains  the  buyer  in  judg- 
ing quality.  The  average  buyer  to-day,  who  makes  pur- 
chases by  name  or  trade-mark  or  on  the  advice  of  the 
retailer,  has  no  such  judgment. 

In  regard  to  some  goods,  the  determination  of  quality 
is  a  technical  problem.  The  average  purchaser  does  not 
possess  such  knowledge.  If  adulteration  or  deterioration 
becomes  detrimental  to  public  health,  the  question  of  main- 
taining standards  is  a  social  one.  It  is  for  this  reason 
that  the  Pure  Food  and  Drug  Act  was  passed  in  1906.  In 
this  place  also  belongs  the  law  of  July  24,  1919,  which 
instructs  the  Department  of  Agriculture  "to  investigate 
and  to  certify  to  shippers  and  other  interested  parties  the 

"Brand,  Improved  Methods  of  Handling  and  Marketing  Cotton, 
p.  455. 


COMMERCIAL  GRADING  OF  COMMODITIES  187 

quality  and  condition  of  fruits,  vegetables,  poultry,  butter, 
hay,  and  other  perishable  farm  products,  when  received  in 
interstate  commerce."  Such  independent  inspection  and 
certification  would  have  averted  the  suspicion  that  attaches 
to  the  commission  merchant  who  deals  in  perishable 
products.  It  will  doubtless  tone  up  the  business  from  pro- 
ducer to  retailer. 

The  problem  of  grading  is  related  to  the  problem  of 
financing  the  marketing.  It  is  unsatisfactory  for  any 
middleman  to  be  ignorant  of  the  grades  of  goods  which 
he  handles.  His  liabilities  may  prove  to  be  unfairly  large 
or  he  may  escape  his  full  responsibility.  But  more  im- 
portant is  the  fact  that  no  one  will  loan  money  against 
goods  of  unknown  quality,  except  at  a  high  rate.  Even 
then  it  is  not  a  sound  commercial  policy.  For  the  proper 
functioning  of  the  warehouse  receipt,  the  trade  acceptance 
and  the  bill  of  lading,  goods  must  be  carefully  graded. 

131.  Scientific  Analysis  as  a  Basis  for  Grading. — More 
and  more  clearly  business  men  are  coming  to  see  that  by 
means  of  weighing,  inspecting,  and  testing,  commodities 
must  be  classified  according  to  grades.  In  times  past  the 
grades  have  been  too  loosely  constructed.  Cotton,  for 
instance,  may  be  upland  or  Sea-Island,  long  staple  or  short 
staple;  wheat  may  be  winter  wheat  or  spring  wheat,  hard 
wheat  or  soft  wheat,  or  "Smooth  Velvet,"  J 'Mediter- 
ranean," "Durum,"  bearded,  or  what  not;  potatoes  may 
be  "Early  Rose"  or  "late  white";  apples  may  be  graded 
on  the  basis  of  geographical  location  of  productive  area, 
or  by  botanical  name.  These  are  not  really  commercial 
grades. 

It  may  be  pointed  out  in  this  place  that  there  is  an 
essential  distinction  between  species,  genera,  and  common 
or  even  trade  names,  on  the  one  hand,  and  commercial 
grades  on  the  other.  The  principle  must  be  applied  here 
that  was  applied  in  the  classification  of  commodities  for 


188  MARKETING 

the  purpose  of  setting  transportation  rates.  The  Inter- 
state Commerce  Commission  said  that  classification  must 
be  based  upon  those  qualities  and  characteristics  that 
affected  the  actual  transportation.  The  principle  in  com- 
mercial grading  is  that  grades  must  be  established  upon 
the  basis  of  utilities,  the  want-satisfying  qualities  when 
applied  to  a  particular  use.  In  the  application  of  this 
principle  science  may  be  an  indispensable  aid. 

It  does  not  make  much  difference  what  kind  of  a  name 
is  applied  to  grades  established  in  this  way,  provided  only 
that  the  buyer  and  seller  may  be  assured  that  the  name 
stands  for  certain  characteristics  and  qualities. 

The  manufacturer  buys  wool  or  cotton  to  make  a  cer- 
tain kind  of  cloth.  If  he  buys  by  grade  he  must  know 
what  the  grades  stand  for  in  relation  to  the  cloth-making 
qualities  of  the  raw  material.  In  the  careless  method  of 
business,  in  some  outlying  districts,  a  cow  is  a  cow  and 
nothing  more,  except  possibly  as  to  color  and  weight.  But 
a  Guernsey  is  more  than  a  mere  cow.  Eggs  are  still  bought 
often  "by  count" — so  much  per  dozen  regardless  of  size 
or  condition.  The  introduction  of  candling  methods  is 
modifying  this.  The  main  point  is  that  goods  are  bought 
to  satisfy  certain  wants ;  if  they  are  bought  at  long  range, 
there  must  be  grades  that  express  the  want-satisfying 
qualities. 

In  order  to  determine  these  qualities  with  accuracy, 
scientific  tests  may  be  made.  Industrial  chemistry  has 
been  developed  for  this  purpose.  The  U.  S.  Bureau  of 
Standards  is  constantly  busied  with  this  problem.  In- 
dustrial plants  have  their  testing  rooms  and  methods. 
Gradually  the  analysis  of  products  with  that  purpose  in 
view  for  which  they  are  to  be  used  is  being  refined  and 
made  more  scientific. 

132.  Machinery  for  Grading'. — Different  kinds  of  ma- 
chinery are  employed  for  grading  commodities  and  for  set- 


COMMERCIAL  GRADING  OF  COMMODITIES  189 

ting  standards  and  units.  The  simplest  process  is  that 
of  inspection.  An  expert  cattle  buyer  may  appear  merely 
to  glance  at  a  drove  of  cattle  before  he  makes  his  offer. 
This  method  requires  no  machinery.  For  testing  the 
moisture  in  corn  there  has  been  devised  a  special  machine. 
Apples,  potatoes,  oranges  may  be  rolled  down  a  board  with 
holes  of  a  certain  size  in  it.  Fruit  may  be  analyzed  for 
its  acidity  in  a  laboratory.  A  large  mail-order  house  has 
a  special  laboratory  equipment  for  testing  the  goods  that 
it  handles.  Special  tests  are  made  under  varying  con- 
ditions for  determining  the  spinning  qualities  of  cotton. 
A  "conditioning  house,"  after  the  Bradford  plan,  may 
be  established  for  ascertaining  invariable  standards  of 
wool.  Ores  may  be  analyzed  chemically;  wood  may  be 
standardized  by  fiber  tests,  or  by  "density  rule." 

In  every  case  the  character  of  the  machinery  required 
will  differ.  The  curious  long-handled  gauge,  the  probe,  or 
"trier,"  used  in  testing  or  sampling  a  car  of  wheat  is  for 
that  purpose  alone.  The  elaborate  apparatus  used  by  a 
corn-products  company  is  wholly  different.  In  one  case 
it  may  be  expensive;  in  another  not.  It  is  to  be  remem- 
bered in  each  instance  that  the  purpose  in  view  is  to  make 
an  analysis  or  a  test  of  the  commodity  as  regards  the 
special  use  to  which  it  is  to  be  devoted.  For  dealings 
on  an  exchange  the  grading  of  wheat  is  not  the  same  as 
the  analysis  by  a  flour  miller.  The  purposes  are  not  the 
same. 

133.  Commercial  Units  and  Standards. — The  units  in 
commerce  develop  gradually  by  usage;  and  even  more 
gradually  are  these  units  standardized.  In  weight,  the 
usage  in  the  United  States  is  the  ounce,  pound,  ton.  Abroad, 
the  metric  system  is  used.  Great  Britain,  as  individualistic 
in  this  as  in  everything  else,  clings  to  an  obsolete  usage; 
wheat  is  sold  by  the  quarter,  the  hundredweight  is  112 
pounds,  the  ton,  2,240   pounds.     There  are  no  accurate 


190  MARKETING 

international  grade  standards  for  commodities.  The  nearest 
approach  to  them  is  in  wheat  and  cotton. 

Each  commodity  is  bought  and  sold  on  the  basis  of  some 
unit.  Grain  is  measured  by  the  bushel ;  coal,  ore,  hay,  by 
the  ton;  salt  by  the  barrel  or  sack;  eggs  by  the  dozen  or 
case;  livestock  by  the  head;  tea  by  the  box  or  chest;  to- 
bacco by  the  hogshead  or  pound ;  cotton  by  the  bale,  round 
or  square;  fruit  by  the  case  or  box  or  crate;  milk  by  the 
bottle,  pint,  quart,  gallon,  or  100  pounds;  butter  by  the 
pound  or  tub.  Thus  it  runs  through  the  entire  list.  Com- 
modities are  dealt  in  on  the  basis  of  certain,  accepted,  and 
well-known-to-the-trade  units  that  have  to  do  with  general 
physical  qualities.  On  this  basis,  too,  there  is  an  approach 
to  standardization ;  sufficiently  so  at  least  to  make  trading 
intelligible. 

There  is  another  kind  of  unit,  or  standard,  by  which  to 
judge  commodities.  This  test  is  the  suitability  of  a  com- 
modity for  a  particular  service.  Physical  measurements, 
or  units,  of  weight,  of  size,  of  bulk,  are  not  enough.  In 
fact  the  establishing  of  true  commercial  grades  demands, 
more  scientific  analysis  than  these.  It  is  the  movement  for 
thoroughly  scientific  grading  that  is  most  significant.  It 
is  proposed  here  to  examine  several  commodities  from  this 
point  of  view. 

134.  Wheat. — An  act  was  passed  on  August  11,  1916, 
called  the  United  States  Grain  Standards  Act,  which 
authorized  the  Secretary  of  Agriculture  to  ' '  investigate  the 
handling,  grading,  and  transportation  of  grain  and  to  fix 
and  establish  as  soon  as  may  be  after  the  enactment  hereof 
standards  of  quality  and  condition  for  corn  (maize),  wheat, 
rye,  oats,  barley,  flaxseed,  and  such  other  grains  as  in  his 
judgment  the  usages  of  the  trade  may  warrant  and  per- 
mit" (Sec.  2). 

As  a  result  of  this  act,  a  careful  investigation  was  made, 
and  on  March  31,  1917,  the  official  grain  standards  for 


COMMERCIAL  GRADING  OF  COMMODITIES  191 

wheat  were  established.  To  reach  these  standards,  the 
grain  must  be  free  from  dockage,  that  is,  free  from  sand, 
dirt,  weed  seeds,  weed  stems,  chaff,  straw,  grain  other  than 
wheat,  and  any  other  foreign  material,  which  can  be  re- 
moved readily  from  the  wheat  by  the  use  of  appropriate 
sieves,  etc.  This  dockage  is  to  be  calculated  in  terms  of 
percentage  of  total  weight.  If  the  grain,  when  freed  from 
dockage,  contains  more  than  6  per  cent  of  grain  of  another 
kind  it  cannot  be  classed  as  wheat. 

All  wheat  was  divided  into  six  classes,  as  follows:  I. 
Hard  Red  Spring;  II.  Common  and  Red  Durum;  III. 
Hard  Red  Winter;  IV.  Soft  Red  Winter;  V.  Common 
White ;  VI.  White  Club.  Each  general  class  is  subdivided 
and  each  subclass  is  graded  into  number  1,  number  2,  num- 
ber 3,  and  so  forth.  The  following  examples  will  illustrate 
the  subdivision  of  a  main  class  and  the  grading  of  a  sub- 
division : 

CLASS  I. 

Hard  Red  Spring 

This  class  shall  include  all  varieties  of  hard  red  spring  wheat, 
but  shall  not  include  more  than  ten  per  centum  of  other  wheat 
or  wheats.  This  class  shall  be  divided  into  four  subclasses  as 
follows : 

Dark  Northern  Spring 

This  subclass  shall  include  wheat  of  the  class  Hard  Red  Spring 
of  which  eighty-five  per  centum  or  more  consists  of  dark,  hard, 
and  vitreous  kernels,  but  shall  not  contain  more  than  ten  per 
centum  of  wheat  of  the  variety  Humpback. 

Northern  Spring 

This  subclass  shall  include  wheat  of  the  class  Hard  Red  Spring 
of  which  less  than  eighty-five  per  centum  and  moi'e  than  twenty- 
five  per  centum  consists  of  dark,  hard,  and  vitreous  kernels,  but 


192  MARKETING 

shall  not  contain  more  than  ten  per  centum  of  wheat  of  the 
variety  Humpback. 

Red  Spring 

This  subclass  shall  include  wheat  of  the  class  Hard  Red  Spring 
which  consists  of  kernels  of  yellow  or  mottled  appearance,  or  of 
starchy  texture,  and  of  not  more  than  twenty-five  per  centum 
of  dark,  hard,  and  vitreous  kernels,  but  shall  not  contain  more 
than  ten  per  centum  of  wheat  of  the  variety  Humpback. 

Red  Sirring  Humpback 

This  subclass  shall  include  wheat  of  the  class  Hard  Red  Spring 
of  which  more  than  ten  per  centum  consists  of  wheat  of  the 
variety  Humpback.3 

Sec.  13.  Grades  for  Hard  Red  Spring  Wheat. — The  sub- 
classes Dark  Northern  Spring,  Northern  Spring,  Red  Spring,  and 
Red  Spring  Humpback  wheat  shall  be  divided  into  six  grades 
for  each  subclass,  the  designations  and  requirements  of  which, 
respectively,  shall  be  as  specified  in  this  section. 

No.  1  Dark  Northern  Spring,  No.  1  Northern  Spring,  and  No.  1 
Red  Spring,  each,  (a)  shall  be  bright,  cool  and  sweet;  (b)  shall 
contain  not  more  than  two  per  centum  of  wheat  of  the  variety 
Humpback  and  of  wheat  of  other  classes,  which  two  per  centum 
may  include  not  more  than  one  per  centum  of  Common  "White, 
White  Club,  or  Common  and  Red  Durum  wheat,  either  singly 
or  in  any  combination;  (c)  shall  contain  not  more  than  thirteen 
and  one-half  per  centum  of  moisture;  (d)  shall  have  a  test 
weight  per  bushel  of  at  least  fifty-nine  pounds;  (e)  shall  contain 
not  more  than  one  per  centum  of  damaged  kernels  and  no  heat 
damaged  kernels;  and  (f)  shall  contain  not  more  than  five-tenths 
of  one  per  centum  of  inseparable  foreign  material,  which  may 
include  not  more  than  one-fourth  of  one  per  centum  of  kinghead, 
corn  cockle,  vetch,  darnel,  or  wild  rose,  either  singly  or  in  any 
combination.4 

aU.  S.   Department  of   Agriculture,  Service  and  Kegulatory  An- 
nouncements, No.  22,  p.  3. 
*Ibid.,  p.  7. 


COMMERCIAL  GRADING  OF  COMMODITIES  193 

Wheat  is  not  all  inspected ;  it  is  sampled.  The  samples, 
however,  must  be  secured  according  to  detailed  instructions. 
In  case  of  disputes,  for  example,  the  sample  must  be  at 
least  two  quarts  in  size  with  approximately  one  and  one- 
eighth  pints  in  an  airtight  container,  obtained  by  at  least 
five  probes  in  the  car  or  wagon,  or  boat,  or  from  sacks  at 
the  discretion  of  inspector,  with  special  samples  for  bad 
spots.  Special  moisture  testers,  grain  sieves,  balances, 
pans,  probes  or  "triers,"  and  containers  are  recommended. 

By  this  means,  common  standards  are  being  set  up  for 
all  parts  of  the  country.  In  the  international  market,  also, 
the  same  standards  are  making  their  way.  Grain  exchanges 
have  greatly  aided  in  this  work.  The  Chicago  Board  of 
Trade  has  gained  a  world-wide  reputation  for  maintaining 
fair  and  accurate  grades. 

135.  Corn. — The  main  standard  classes  for  corn,  three 
in  number,  are  based  on  color.  They  are:  white,  yellow, 
and  mixed.  White  corn  is  to  consist  of  at  least  98  per  cent 
by  weight  of  white  kernels.  ' '  A  slight  tinge  of  light  straw 
color  or  of  pink  on  kernels  of  corn  otherwise  white  shall 
not  affect  their  classification  as  white  corn."  Yellow  corn 
is  to  consist  of  corn  that  has  at  least  95  per  cent,  by  weight, 
of  j^ellow  kernels.  "A  slight  tinge  of  red  on  kernels  of  corn 
otherwise  yellow  shall  not  affect  their  classification  as 
yellow  corn."  Mixed  corn  is  made  up  of  a  combination  of 
white  and  yellow  and  of  other  colors.  "White  capped 
yellow  kernels  shall  be  classified  as  mixed  corn. ' ' 

Each  class  is  graded  into  seven  grades,  numbered  1  to  7. 
"No.  1,  white,  yellow  and  mixed,  each,  (a)  shall  be  cool 
and  sweet,  (b)  shall  have  a  test  weight  per  bushel  of  at 
least  fifty-five  pounds,  (c)  may  contain  not  more  than 
fourteen  per  centum  of  moisture,  (d)  may  contain  not 
more  than  two  per  centum  of  foreign  material  or  cracked 
corn,  and  (e)  may  contain  not  more  than  two  per  centum 
of  damaged  corn  and  no  heat-damaged  kernels." 


194  MARKETING 

It  is  interesting  to  note  this  relation  of  color  to  quality. 
The  first  test  of  corn  is  color ;  the  second  is  moisture,  then 
weight  and  then  follows  an  examination  of  other  character- 
istics. From  first  to  last,  however,  the  aim  is  to  judge  this 
commodity  on  the  basis  of  qualities  fitted  to  satisfy  certain 
wants. 

136.  Cotton. — As  has  been  pointed  out  previously,  the 
cotton  exchanges  failed  to  function  correctly,  due  to  faulty 
grading  and  correlative  causes.  The  U.  S.  Department  of 
Agriculture,  in  1909,  established  the  official  cotton  grades, 
but  these  have  not  been  universally  accepted. 

Several  different  standards  are  now  in  use.  These  are  usually 
referred  to  by  the  names  of  the  exchanges  which  promulgate 
them,  as  the  Liverpool  grades,  New  York  grades,  Augusta  grades, 
etc.  The  "middling"  of  one  market  is  not  the  same  as  that  of 
another,  and  likewise  with  other  grades.  Identical  names  are 
applied  in  different  markets  to  cotton  that  differs  in  quality, 
value  and  price.  The  national  standards  were  prepared  to 
remedy  this  condition.  Nine  official  grades  are  recognized,  as 
follows:  Middling  fair,  strict  good  middling,  good  middling, 
strict  middling,  middling,  strict  low  middling,  low  middling,  strict 
good  ordinary,  and  good  ordinary.  The  grades  designated  by 
the  prefix  "strict"  are  known  in  the  trade  as  half  grades.5 

It  is  clear  that  such  grading  must  be  made  by  inspection, 
and  that  at  best  it  is  vague.  The  usual  method  is  to  grade 
by  the  bale.  A  bale  is  torn  in  the  bagging  and  the  hand  is 
thrust  in,  seizes  a  handful  of  cotton  and  draws  it  out.  This 
process  may  be  followed  at  two  or  more  parts  of  the  bale. 
The  entire  bulk  of  cotton  is  thus  judged,  and  on  grades 
thus  established  cotton  is  traded  in  on  the  exchanges. 

This  method  of  grading  has  been  inadequate.  The  qual- 
ity of  cotton  is  affected  by  (a)  the  time  of  ripening,  (b) 

""Handling  and  Marketing  Cotton,"  Yearbook  of  the  Depart- 
ment of  Agriculture,  1912,  p.  455. 


COMMERCIAL  GRADING  OF  COMMODITIES  195 

the  time  of  harvesting,  (c)  methods  of  picking,  (d)  soil 
conditions,  (e)  storms,  (f )  frosts,  etc.  The  grading  factors 
are:  (1)  color,  (2)  relative  freedom  from  leaf  or  other 
foreign  substance,  (3)  character.  Commercial  grades, 
however,  have  not  considered  the  fundamental  test  of  all 
textiles.  This  is  the  spinning  test.  The  Department  of  Ag- 
riculture has  made  comparative  spinning  tests  of  Arizona- 
Egyptian  cotton  with  Sea-Island  and  Sahalleradis  Egyp- 
tian cottons.  Tensile  strength  comparisons,  bleaching,  dye- 
ing, and  mercerizing  comparative  tests  were  made;  likewise, 
relative  length  of  stable,  pliability,  cling,  and  evenness. 
Obviously,  these  are  scientific  tests  that  apply  to  the  uses  of 
cotton  and  furnish  the  true  basis  of  grades.  As  a  result  of 
these  tests,  the  official  standards  have  been  set  and  accurate 
samples  of  each  standard  are  now  in  the  hands  of  all  cotton 
exchanges,  and  four  sets  have  been  locked  in  steel  vaults 
for  safe  keeping.  This  method  compares  favorably  with  the 
Bradford  wool  tests. 

There  is  a  movement  on  foot  to  make  the  standard  grades 
international.  This  was  proposed  at  an  International 
Cotton  Congress  in  1907.  No  progress  was  made,  however, 
until  June,  1913,  when  representatives  of  the  cotton  ex- 
changes at  Liverpool,  Havre,  and  Bremen,  and  of  the  lead- 
ing American  exchanges  met  in  Liverpool  and  adopted  the 
so-called  International  Standards.  But  the  Americans  did 
not  bind  themselves  to  this  decison,  unless  they  were 
adopted  by  the  Department  of  Agriculture.  In  1914,  the 
Department  undertook  to  set  up  independent  standards, 
and  it  was  decided  to  be  undesirable  to  follow  the  Interna- 
tional Standards.  A  universal  set  of  standards  would  be 
a  consummation  greatly  to  be  desired. 

137.  Potatoes.— The  Bureau  of  Markets  of  the  U.  S. 
Department  of  Agriculture,  by  investigation  and  demon- 
stration, established  the  practicability  of  reducing  potatoes 
to  commercial  grades.    Field  tests  were  made  in  the  grad- 


196  MARKETING 

ing  and  packing  of  potatoes  and  their  marketing  by  grade 
as  compared  with  the  ungraded.  As  a  result  of  the  experi- 
ence the  Department  of  Agriculture  has  recommended  the 
following  grades: 

U.  S.  Grade  No.  1 

This  grade  shall  consist  of  sound  potatoes  of  similar  varietal 
characteristics,  which  are  practically  free  (a)  from  dirt  or  other 
foreign  matter,  frost  injury,  sunburn,  second  growth,  cuts,  scab, 
blight,  dry  rot,  and  damage  caused  by  disease,  insects,  or  me- 
chanical means.  The  minimum  diameter,  (b)  of  potatoes  of 
the  round  varieties  shall  be  one  and  seven-eighths  (lYs)  inches, 
and  of  potatoes  of  the  long  varieties  one  and  three-fourths 
(13A)  inches.  In  order  to  allow  for  variations  incident  to  com- 
mercial grading  and  handling,  five  per  centum  by  weight  of 
any  lot  may  be  under  the  prescribed  size,  and,  in  addition,  three 
per  centum  by  weight  of  any  such  lot  may  be  below  the  remain- 
ing requirements  of  this  grade. 

U.  S.  Grade  No.  2 

This  grade  shall  consist  of  potatoes  of  similar  varietal  char- 
acteristics, which  are  pi*actieally  free  (a)  from  frost  injury  and 
decay,  and  which  are  free  from  serious  damage,  (c)  caused  by 
dirt  or  other  foreign  matter,  sunburn,  second  growth,  cuts,  scab, 
blight,  dry  rot,  or  other  disease,  insects,  or  mechanical  means. 
The  minimum  diameter  (b)  shall  be  one  and  one-half  (l1/^) 
inches.  In  order  to  allow  for  variations  incident  to  commercial 
grading  and  handling,  five  per  centum  by  weight  of  any  lot  may 
be  under  the  prescribed  size,  and,  in  addition,  five  per  centum 
by  weight  of  any  such  lot  may  be  below  the  remaining  require- 
ments of  this  grade. 

Explanations  of  Grade  Requirements 

(a)  "Practically  free"  means  that  the  appearance  shall  not 
be  injured  to  an  extent  readily  apparent  upon  casual  examination, 
and  that  any  damage  from  the  causes  mentioned  can  be  removed 


COMMERCIAL  GRADING  OF  COMMODITIES  197 

by  the  ordinary  processes  of  paring  without  appreciable  increase 
in  waste  over  that  which  would  occur  if  the  potato  were  perfect. 
Loss  of  the  outer  skin  (epidermis)  only  shall  not  be  considered 
as  an  injury  to  the  appearance. 

(b)  "Diameter"  means  the  greatest  dimension  at  right  angles 
to  the  longitudinal  axis. 

(c)  "Free  from  serious  damage"  means  that  the  appearance 
shall  not  be  injured  to  the  extent  of  more  than  twenty  per  centum 
of  the  surface,  and  that  any  damage  from  the  causes  mentioned 
can  be  removed  by  the  ordinary  processes  of  paring  without 
increase  of  more  than  ten  per  centum  by  weight  over  that  which 
would  occur  if  the  potatoes  were  perfect. 

The  crudeness  of  this  method  of  grading  is  obvious.  It 
is  apparent,  too,  that  these  two  grades  were  not  intended  to 
be  accepted  by  the  wholesaler  and  retailer.  Much  more 
must  yet  be  done  before  lasting  grades  are  established. 

138.  Hides  and  Skins. — As  might  be  expected  before- 
hand, the  grading  of  hides  and  skins  bought  in  the  country 
is  very  indefinite.  The  producer  is  usually  unable  to  dis- 
tinguish between  grades.  There  has  developed  as  a  work- 
ing basis  a  system  of  grading  by  geographical  sections. 
The  buyers  have  divided  the  United  States  into  nine  sec- 
tions and  have  made  price  differentials  on  these  sections  for 
similar  weights  and  classes.  "  It  is  asserted  that  the  condi- 
tions which  produce  these  differences  on  which  the  result- 
ing price  differentials  are  based  are  noticeable  especially  in 
the  grain,  texture,  thickness,  spread,  and  quality  of  the 
leather,  and  that  they  are  caused  largely  by  climatic  con- 
ditions, methods  of  handling  cattle,  kinds  of  cattle,  kinds 
of  feed,  methods  of  feeding,  ticks,  grubs,  brands,  environ- 
ment, and  the  methods  employed  in  skinning,  curing,  and 
marketing  the  hides."0 

If  the  geographical  sections  enable  the  putting  of  hides 

•U.  S.  Department  of  Agriculture,  Farmer's  Bulletin  No.  1055, 
p.  43. 


108  MARKETING 

and  skins  into  grades  on  the  basis  of  the  qualities  indicated, 
the  means  is  a  reasonable  one.  The  grain,  texture,  thick- 
ness, spread,  and  quality  of  leather  are  certainly  essential 
to  the  establishing  of  true  grades. 

139.  Lumber. — To  standardize  the  output  of  Southern 
Yellow  Pine  the  Southern  Pine  Association  has  adopted  a 
set  of  standard  specifications. 

Fully  90  per  cent  of  the  output  of  Southern  Yellow  Pine 
lumber  hi  the  States  named  (Texas,  Arkansas,  Missouri, 
Louisiana,  Mississippi,  Alabama,  Georgia,  and  Florida)  is  graded 
and  classified  according  to  the  Standard  Specifications  of  the 
Southern  Pine  Association.  .  .  .  Quotations  of  prices  are 
usually  made  upon  the  basis  of  these  Grading  Rules,  -which  in 
all  essential  features  have  been  recognized  by  the  lumber  trade 
for  many  years. 

Buyers  of  Southern  Pine  lumber  are  respectfully  requested  to 
familiarize  themselves  with  these  in  order  that  they  may  know 
what  they  are  contracting  for  when  placing  orders,  and  to  serve 
as  a  guide  in  determining  whether  lumber  received  is  in  accordance 
with  the  grade  ordered.7 

The  general  commercial  grades  of  common  lumber  are 
determined  by  inspection.  The  "recognized  defects  in 
Yellow  Pine  are  knots,  knot  holes,  splits  (either  from  sea- 
soning, ring  hearts,  or  rough  handling),  shake,  wane,  red 
heart,  pith,  rot,  rotten  streaks,  worm  holes,  pitch,  pitch 
pockets,  torn  grain,  loosened  grain,  seasoning  checks,  sap 
stains,  crooks  and  defects  caused  by  manufacturing. ' ' 8 
Clearly  these  defects  affect  the  qualities  of  lumber  in  rela- 
tion to  its  use.  However  loosely  constructed  the  grades  are, 
they  are  placed  on  the  proper  basis. 

There  has  long  been  an  interest  in  establishing  lumber 
grades.     In  1909  the  American  Society  for  Testing  Ma- 

*  Standard  Specifications,  preface. 
8  Ibid.,  p.  7. 


COMMERCIAL  GRADING  OF  COMMODITIES  199 

terials  proposed  that  the  grades  should  be  based  on  the 
number  of  rings  per  inch.  Although  this  system  was 
widely  used,  it  was  too  indefinite  to  be  satisfactory.  The 
Forest  Service,  after  a  careful  study  of  all  kinds  of  trees, 
presented  a  new  method  of  grading,  known  as  the  ' '  density 
rule,"  which  was  adopted  in  August,  1915.  This  rule  pro- 
vides for  two  classes,  the  Dense  and  the  Sound.  The  first 
class  is  determined  by  careful  requirements  and  by  accu- 
rate measurements,  "Variation  in  the  individual  character 
of  different  pieces  of  timber  is  responsible  for  the  difference 
in  strength.  Structurally,  some  are  much  stronger  than 
others."  Upon  this  essential  quality  the  grades  are 
founded.  It  furnishes  an  interesting  attempt  to  reduce  a 
difficult  commodity  to  scientific  standards. 

140.  Apples. — Broad  classes  in  the  apple  trade  are  made 
on  the  character  of  the  packing.  Some  cities  are  known  as 
boxed-apple  markets,  some  as  barreled-apple  markets,  and 
others  as  bulk-apple  markets.  Clearly,  these  are  not  in  reali- 
ty grades.  There  is  a  law,  mandatory  in  some  states,  which 
provides  for  four  grades, ' '  Fancy, "  ' '  A  grade, "  ' '  B  grade, ' ' 
and  "Unclassified."  There  is  an  obvious  attempt  to  relate 
grades  to  qualities  in  this  system.  It  is  unfortunate,  how- 
ever, to  have  laws  establishing  diverse  grades  throughout 
the  country.  Standardization  on  the  basis  of  scientific 
grades  in  all  market  centers  is  highly  desirable  for  every 
kind  of  commodity. 

141.  Tendency  to  Grading  and  Effect  on  Commodity. — 
Whatever  the  character  of  the  commodity,  as  it  finds  its 
way  into  market  it  will  begin  to  develop  classes  and  grades. 
These  may  have  for  their  foundation  the  botanical  divisions, 
but  this  will  be  true  only  where  the  qualities  affecting  tho 
utility  differ  in  accordance  with  the  botanical  classes.  Com- 
mercial grades  tend  inevitably  toward  this  basis  of  quality. 
The  quality  demanded  in  ores  may  be  purity,  freedom  from 
dross  or  foreign  substances.    Required  standards  of  purity 


200  MARKETING 

are  secured  through  chemical  processes.  Furs  may  be 
graded  by  kinds  ou  the  basis  of  appearance  and  durability. 
Milk  is  graded  on  the  percentage  of  butter  fat  that  it  con- 
tains; Chicago  by  ordinance  requires  3.5  per  cent.  Tea, 
coffee,  tobacco  may  have  flavor  as  the  foundation  of  grades. 
Attempts  have  been  made  to  grade  oranges  according  to 
the  amount  of  acidity  as  well  as  by  size. 

There  are  several  methods  of  arriving  at  commercial 
grades.  Livestock  to  be  butchered  is  inspected  individually 
and  its  meat-producing  qualities  judged.  A  great  number 
of  raw  materials  and  foodstuffs  must  be  so  inspected.  In 
addition  to  inspection  the  commodities  may  need  to  be 
weighed.  One  test  for  corn  grades  is  so  many  pounds  per 
bushel.  And  even  in  addition  to  the  grading,  the  com- 
modities may  need  weighing  to  determine  commercial  units. 
The  two  things  must  go  together — standards  and  units — 
before  intelligent  marketing  can  be  carried  on.  The  com- 
mercial units  may  need  to  be  measured  instead  of  being 
weighed.  A  law  was  passed  August  31,  1916,  entitled  the 
United  States  Standard  Container  Act,  which  defines  defi- 
nitely the  standards  in  cubic  inches  for  baskets  to  be  filled 
with  grapes,  fruit,  and  vegetables.  A  table  of  the  ''varia- 
tions" and  "tolerances"  permitted  is  also  given.  The  law 
went  into  effect  November  1,  1917.  More  refined  grades 
are  determined  by  scientific  analysis. 

There  is  no  doubt  that  the  insistence  upon  more  careful 
grading  has  benefited  the  producer  materially.  Not  only 
has  he  become  a  more  intelligent  salesman,  but  he  also  has 
given  much  more  care  to  the  commodities,  in  culture,  in 
handling,  in  packing.  It  has  been  a  severe  but  wholesome 
lesson  to  teach  the  producers  of  perishable  products  that 
methods  of  refrigeration  cannot  undo  the  evils  of  careless- 
ness previous  to  storage.  Grading  has  toned  up  com- 
modities all  along  the  line.  It  has  made  possible  the 
"fancy"  goods,  at  the  same  time  that  it  has  raised  the 


COMMERCIAL  GRADING  OF  COMMODITIES  201 

standard  of  the  lowest  grades.    Better  goods  flow  to  mar- 
ket on  grade  than  without  grade. 

142.  Effects  Upon  Trade  Organization. — There  is  a 
wholesome  effect  also  upon  the  middleman.  The  honest 
men  are  defended  from  the  rogues.  The  reputation  of  alJ 
dealers  suffers  when  false  measures  are  found  in  the  mar- 
ket. It  is  possible  to  buy  more  intelligently  and  confidently 
at  long  range.  Thus  the  limits  of  the  market  can  be  ex- 
tended. Organized  exchanges  are  made  possible;  future 
contracts  that  run  "on  grade"  call  forth  the  specialized 
middleman  to  take  the  risks.  As  better  marketing  methods 
develop  there  is  a  beneficial  reflex  upon  business  men. 
' '  More  intelligent  business  is  better  business. ' ' 

143.  Grades  and  Prices. — There  is  a  definite  relation 
between  grades  and  prices,  as  there  should  be.  A  standard 
grade  not  only  fosters  more  intelligent  trading,  but  also 
furnishes  a  basis  for  standard  prices.  Future  contracts 
are  made  on  a  basic  grade,  say,  "middling"  grade  of  cot- 
ton, No.  1  Northern  Spring  grade  of  wheat.  This  does 
not  mean  that  these  grades  will  be  delivered  on  the  con- 
tract, but  that  the  price  quoted  will  be  in  terms  of  this 
grade.  Then,  if  other  grades  are  delivered,  price  adjust- 
ments will  be  made  for  grades  above  and  below,  usually  at 
a  fixed  differential  in  price.  Before  the  official  wheat 
standards  were  set,  prices  for  the  same  commercial  grade 
varied  from  four  or  five  cents  to  seventeen  cents  per  bushel. 

Each  organized  exchange  adopts  regulations  determining 
the  deliverable  grades  and  agrees  upon  the  price  differences. 
In  the  case  of  cotton  these  differences  are  "commercial 
differences,"  that  is,  differences  determined  by  actual 
transactions  in  the  market.  But  quite  apart  from  these 
established  margins,  a  basic  grade  aids  in  stabilizing  prices. 
This  grade  is  like  the  surveyor's  corner  stone,  always  a 
point  of  departure,  always  something  to  return  to  for  com- 
parison.    Inspection   and  grading  greatly   facilitate   the 


202  MARKETING 

quotation  and  publication  of  "spot,"  as  well  as  future, 
prices. 

144.  Responsibility  for  Standard  Grades. — Until  re- 
cently the  organized  exchange  has  been  most  constructive 
in  establishing  grades.  This  institution  found  it  necessary 
for  its  own  proper  functioning  to  deal  on  grades.  These, 
too,  had  to  be  carefully  determined  and  rigidly  maintained 
for  its  own  protection.  Thus,  the  Chicago  Board  of  Trade 
has  a  world-wide  reputation  for  maintaining  accurate 
standards.  Lately,  however,  the  Federal  Government  has 
taken  the  matter  up  and  has  denned  the  official  standards 
for  wheat,  corn,  cotton,  and  is  engaged  in  the  laudable  task 
of  directing  the  marketing  of  many  other  commodities  by 
grade.  There  is  no  reason  why  the  government  and  private 
industry  should  not  cooperate  in  this  work.  In  certain  com- 
modities where  adulteration  becomes  a  menace  to  public 
health,  the  responsibility  is  directly  on  the  government  to 
set  and  maintain  the  necessary  standards. 

It  was  this  responsibility  on  government  that  brought 
into  being  the  Pure  Food  and  Drug  Act  of  1906,  that 
created  an  Inspection  Bureau  for  foodstuffs  during  the  war. 
Laws  are  becoming  more  and  more  strict  about  the  cold 
storage  of  perishable  products.  Eggs,  butter,  poultry, 
meats,  that  have  become  unhealthful  must  not  be  sold  in 
the  markets.  Thus,  the  caveat  emptor  principle  fades 
away  and  governmental  control  emerges. 

The  producer  can  gain  for  his  own  products  not  only  a 
touch  of  individuality  but  also  a  premium  as  to  price  by 
special  care  in  grading  his  products.  Thus,  Western  fruit 
carries  a  premium  in  the  Chicago  market  over  Michigan 
fruit,  because  of  greater  scrupulousness  in  grading  and 
packing.  A  grade  is  not  established  by  the  top  layer,  but  by 
the  poorest  quality.  When  a  carload  of  grain  is  inspected, 
samples  are  taken  from  various  parts  of  the  car,  and  these 
different  samples  together  establish  the  grade.    If  the  sam- 


COMMERCIAL  GRADING  OF  COMMODITIES  203 

pies  show  a  layer  of  good  wheat  on  top  and  a  poor  grade 
below,  the  entire  lot  goes  at  the  rating  of  the  latter.  The 
producer  who  tries  in  this  way  to  deceive  the  dealer  is 
only  deceiving  himself.  One  act  of  this  sort  may  tarnish  an 
otherwise  unblemished  reputation.  There  is  an  inescapable 
responsibility  on  the  producer  for  fair  dealing. 

145.  Grading  and  Packing. — The  reduction  of  com- 
modities to  standard  units  touches  also  the  problem  of 
packing.  In  foreign  trade  this  has  become  a  vital  issue, 
but  even  in  domestic  trade  it  has  been  an  important  sub- 
ject much  neglected.  Goods  should,  of  course,  be  so  packed 
as  not  to  lose  their  original  grading.  Further  than  this, 
there  is  science  in  the  packing  itself.  At  the  University  of 
Wisconsin  a  study  has  been  made  of  this  subject,  and  prin- 
ciples are  being  evolved.  Efficiency  in  loading  cars  and 
ships,  strength  to  withstand  pressure,  economy  of  space 
within  the  box  itself,  convenience  in  handling,  as  well  as 
adapting  the  packing  to  the  character  of  the  commodity, 
length  of  journey,  and  means  of  transportation,  are  all  in- 
volved. 

Suggestions  for  Study 

The  student  should  here  study  the  problem  of  commer- 
cial grading  as  it  applies  to  the  special  commodity  which  he 
has  under  investigation.  The  topics  given  below  may  be 
made  the  basis  of  further  study  in  which  the  readings  that 
follow  will  be  of  great  assistance : 

1.  Definition  of  a  standard  grade,  a  basic  grade. 

2.  Governmental  establishment  and  maintenance  of  grades. 

3.  Laboratory     experiments    to    set    grades    in     perishable 

products. 

4.  Determining  the  basic  qualities  for  grades. 

5.  Standard  grades  and  prices. 

6.  Standard  grades  and  speculation. 

7.  Uniform  standards  of  grading. 

8.  Standard  grades  in  relation  to  "hedging." 


204  MARKETING 

9.  Grading  of  materials  and  manufactured  products. 

10.  Mixing  grades  in  storage. 

11.  Grading  function  in  relation  to  middleman. 

12.  Width  of  grades. 

13.  Grade  steps:  how  determined. 

14.  Definite  limits  to  grades. 

15.  Possibilities  of  scientific  grading. 

Readings  : 

U.  S.  Department  of  Agriculture,  Bulletin  102,  pp.  35-8,  45, 

summary. 
Service  and  Regulatory  Announcements,  Nos.  33,  7,  54, 

11,  12,  13,  35,  6,  24. 

Farmer's  Bulletins,  919,  1055,  359,  366. 

Year  Book,  1912,  pp.  443-61. 

Circular  No.  76,  No.  144. 

Huebner,   Agricultural    Commerce,   Chap.   XIII,   pp.   262-70; 

Chap.  IX. 
Weld,  Marketing  Farm  Products,  p.  278. 
Adams,  Marketing  of  Perishable  Farm  Products,  p.  175. 
"Wiest,  Butter  Industry,  Chap.  V. 
"Booklet  of  Illinois  Grain  Inspection  Department." 
Lyon,  T.  L.,  Examining  and  Grading  Grain. 
Annals    of   the   American   Academy   of   Social   and   Political 

Science,  September,  1911,  pp.  58-90. 
Miller,  Cotton-Trade  Guide,  Chap.  I. 

U.  S.  Department  of  Commerce  and  Labor,  Bureau  of  Manu- 
facturers, Special  Act,  Series  No.  58. 
U.  S.  Department  of  Commerce,  Summary  of  Representatives 

of  Commissioner  of  Corporations  on  Cotton  Exchanges. 
Southern  Pine  Association,  New  Orleans,  La.,  "Southern  Pine 

Timbers,"  January,  1917. 


CHAPTER  X 

TRADE    INFORMATION 

An  ingenious  Englishman  presented  a  paper,  copiously 
illustrated,  before  the  Royal  Society  of  Science  in  1699, 
dealing  with  a  new  invention  which  he  had  just  made.  This 
invention  was  a  huge  megaphone,  or  "speaking  trumpet," 
set  up  on  standards,  and  it  was  devised  for  the  purpose  of 
communicating  at  great  distances.  A  sovereign,  it  was 
claimed,  could  stand  on  some  promontory  in  the  midst  of 
his  realm  and  send  his  voice  to  its  farthest  corner;  he 
could  stand  on  the  shore  and  command  his  ships  far  out  at 
sea;  he  could  issue  proclamations  and  control  activities 
of  peace  as  well  as  give  orders  to  his  vast  armies  in  times 
of  war.  News  of  disaster  or  success  could  be  conveyed  in- 
stantly from  one  section  of  the  country  to  another.  In 
fact,  the  "stentorophone,"  as  it  was  called,  was  to  become 
an  instrument  for  making  possible  an  instantaneous  trans- 
mission of  news. 

The  "stentorophone"  would  not  work,  of  course,  but  its 
inventor  had  undoubtedly  caught  a  glimpse  of  the  signifi- 
cance of  a  great  idea — that  information,  knowledge,  news, 
is  a  vital  element  in  both  peace  and  war.  In  no  part  of 
human  activity  is  this  element  of  information  more  impor- 
tant than  the  economic,  and  especially  in  that  most  sensi- 
tive of  all  economic  mechanisms,  the  market.  There  knowl- 
edge is  literally  power.  Market  news  is  the  nervous  system 
of  the  market. 

146.  What  Is  Trade  Information? — "All  news  is  market 
news,"  said  one  of  the  leading  crop  experts  of  the  country. 

205 


206  MARKETING 

Whatever  has  any  effect  upon  the  market  price  is  trade  in- 
formation. This  means  that  any  event  which  changes  in  any 
respect  the  supply  of  or  demand  for  any  commodity  is 
market  news.  The  event  does  not  need  to  be  economic  in 
character;  it  may  be  the  election  of  a  senator  or  a  Presi- 
dent ;  it  may  be  a  political  or  a  social  event  abroad.  "What- 
ever influences  trade  and  trade  relationships  is  market 
news.  But  such  event  is  not  really  in  itself  market  news ; 
it  becomes  so  as  it  passes  through  the  mind  of  the  business 
man,  where  it  is  transmuted  from  an  historical  incident  into 
trade  information.  The  facts  are  the  raw  materials;  the 
business  man's  interpretation  of  them  is  the  market  news. 
For  market  news  is  nothing  more  than  the  reports  of  events 
and  happenings  of  the  world  acted  upon  by  a  trained  and 
experienced  business  mind. 

Of  market  news,  time  is  the  essence.  For,  in  the  bar- 
gaining process  superior  knowledge  may  be  secured  in  two 
ways;  it  may  be  a  broader,  sounder,  more  comprehensive 
knowledge,  or  it  may  be  an  earlier  knowledge.  As  a  mar- 
ket becomes  more  and  more  thoroughly  organized,  competi- 
tion in  knowledge  tends  to  be  narrowed  to  securing  an 
earlier  knowledge.  A  marvelously  efficient  organization  has 
been  developed  as  a  result  of  this  sort  of  rivalry,  and  has 
concentrated  itself  in  the  organized  exchanges.  As  has 
been  shown  already,  the  activity  most  frequently  associated 
with  organized  exchanges  is  dealing  in  "futures,"  and  to 
deal  intelligently  there  must  be  a  broad  and  sound  basis 
of  knowledge.  The  very  sensitiveness  of  exchange  prices 
is  due  to  their  immediate  response  to  market  news. 

The  facts  secured  from  all  parts  of  the  world  by  the  ex- 
change brokers  pass  through  the  minds  of  these  seasoned 
and  expert  traders  and  are  there  transmuted  into  market 
news.  A  drought  in  Argentina,  a  flood  in  China,  a 
volcanic  eruption  in  the  Antipodes,  will  be  instantly  trans- 
lated into  dollars  and  cents  in  the  prices  of  commodities. 


TRADE  INFORMATION  207 

Knowledge  of  facts,  then,  that  can  be  judged  on  a  price 
basis  is  market  information. 

147.  Function  of  Market  News. — The  physical  world 
turns  on  its  axis.  The  ancient  mind  conceived  of  it  as  being 
pivoted  on  the  shoulders  of  a  giant,  Atlas.  It  is  a  "going 
concern,"  whose  activities  are  adjusted  by  certain  forces. 
There  is  a  loose  analogy  here  with  the  world  of  business. 
It,  too,  is  a  "going  concern."  Like  the  physical  world, 
it  turns  on  its  axis  and  pivots  on  the  shoulders  of  its 
Atlas.  The  pivot  and  the  axis  of  the  business  is  price ;  and 
the  essence  of  price  is  market  news. 

Practically,  the  consumer  usually  pays  the  price  that  is 
asked  by  the  seller  in  the  retail  trade.  He  does  not  know 
enough  facts,  either  as  to  cost  or  as  to  quality,  to  bargain 
on  an  equality  with  the  retailer.  He  must  make  his  deci- 
sion to  buy  or  to  refuse  to  buy  on  the  basis  of  relative  mar- 
ginal utility.  The  price  is  asked,  and  the  consumer  either 
decides  the  article  is  not ' '  worth "  it  or  another  article  will 
do.  In  other  words,  the  buyer  and  seller  do  not  build  a 
price  anew,  from  the  ground  up,  by  any  sort  of  higgling. 
Business  is  a  going  concern  and  to-day 's  price  is  yesterday 's 
price  modified  only  by  some  bit  of  market  news.  To-mor- 
row's price  will  be  to-day's  unless  changed  by  some  kind 
of  market  news.  The  center  and  core  of  modern  business 
transactions  is  market  news,  operating  through  price 
changes. 

Price  setting  is  a  process  of  adjustment,  called  bargain- 
ing. The  basis  of  bargaining  is  market  news.  It  is  this 
that  keeps  the  prices  balanced  to  market  conditions,  whether 
local,  national  or  international.  Some  foodstuffs  have  a 
world  market ;  their  prices  are  adjusted  to  world  conditions. 
Everybody  knows  that  the  world  must  eat ;  the  demand  is 
ever  present,  insatiable.  Any  substantial  decrease  in  sup- 
ply brings,  as  from  the  dead,  the  specter  of  want.  It  is 
desirable  that  foodstuff  markets  be  stabilized  as  much  as 


208  MARKETING 

possible.  The  only  way  to  stabilize  markets  is  to  stabilize 
price,  and  the  only  way  to  stabilize  price  is  to  make  known 
instantly  all  the  essential  facts  about  supply  and  demand. 

There  is  the  classic  story  of  the  elder  Rothschild  who  laid 
the  foundation  of  the  great  fortune  of  that  prosperous  fam- 
ily. He  is  said  to  have  been  an  eye-witness  of  the  battle  of 
Waterloo.  Previously,  he  had  arranged  for  a  relay  of 
horses  to  carry  him  with  the  quickest  possible  dispatch  from 
his  post  of  observation  to  the  Channel  and  from  the  Chan- 
nel to  London.  He  watched  the  ebb  and  flow  of  the  tide  of 
battle  until  the  decisive  moment  came,  until  the  final  out- 
come became  manifest.  Then  he  started  for  London,  rid- 
ing night  and  day  until  he  reached  his  destination.  For 
what  purpose?  To  buy  stocks  on  the  Exchange.  He  car- 
ried momentous  market  news.  While  that  news  was  his 
alone,  he  had  a  monopoly,  and  on  this  brief  monopoly  he 
laid  the  foundation  of  a  vast  fortune. 

The  world  is  not  different  to-day  in  its  essential  business 
organization.  It  still  pivots  on  price  and  the  essence  of 
price  is  still  market  news.  Consider  the  economic  signifi- 
cance of  the  telegraph,  the  telephone,  the  wireless,  the  news- 
paper, the  postal  system,  the  airplane.  Much  has  been 
written  of  these  things  to  show  their  marvelous  ingenuity 
and  convenience.  They  have  broadened  the  horizon  and 
have  brought  the  ends  of  the  earth  nearer  together.  But 
greater  than  all  of  these  things  for  the  welfare  of  the 
world  is  the  fact  that  they  carry  news  of  such  dynamic  force 
in  business.  Local  markets  through  them  have  broadened 
into  national  and  international  markets;  local  prices 
through  them  have  become  national  and  international  prices. 

For  the  market  of  any  commodity  is  bounded  by  an 
effective  demand  for  it  at  a  prevailing  price,  and  a  price 
will  tend  to  prevail  throughout  the  region  where  men  buy 
and  sell  upon  the  same  knowledge  of  business  facts.  Wheat 
is  said  to  have  a  world  market  because  there  is  a  world 


TRADE  INFORMATION  209 

price,  and  there  is  a  world  price  because  it  is  adjusted  to 
world  conditions.  Dealing  in  wheat  is  a  world-wide,  going 
concern ;  its  price  is  not  established  anew  from  the  founda- 
tion up  every  day  or  every  minute  in  the  day.  Price  de- 
termination of  this,  and  of  every  other  commodity  on  the 
market,  is  a  progressive  affair.  The  old  price  is  utilized  in 
making  the  new.  The  price  of  to-day  is  not  a  brand  new, 
hand-made  or  machine-made,  price.  It  is  the  interpreta- 
tion into  terms  of  money  of  the  world  condition ;  it  is  the 
best  expert  opinion  of  market  news. 

It  may  be  seen,  therefore,  that  market  news  is  the  central 
organizing  force  in  the  market,  because  it  is  the  essence  of 
market  price.  It  functions  as  an  organizing  force  through 
all  middlemen,  through  warehouses,  organized  exchanges, 
the  wholesale  and  the  retail  system. 

The  justification  of  such  middlemen  as  jobbers,  brokers, 
commission  men,  as  has  been  said,  is  their  superior  knowl- 
edge of  the  market.  In  the  process  of  making  their  or- 
ganizations effective  they  tend  to  disseminate  knowledge 
to  producers  and  consumers;  gradually  the  producer  and 
the  consumer  draw  nearer  together  and  exchange  such  in- 
formation as  is  to  their  mutual  advantage.  The  middle- 
man whose  function  is  thus  absorbed  tends  to  disappear. 

Markets  are  organized  for  two  purposes.  One  is  the  ac- 
tual handling  of  the  commodities,  the  real  process  of  dis- 
tributing goods;  the  other  is  buying  and  selling.  For  in- 
telligent buying  and  selling  market  news  is  essential.  It 
serves  more  and  more  this  vitalizing,  directive  function. 

148.  Organizations  for  Securing  Market  Information. — 
For  performing  this  necessary  function  many  kinds  of  or- 
ganizations have  developed.  On  the  basis  of  control  these 
organizations  are  of  two  different  types:  (1)  governmen- 
tal, and  (2)  private. 

149.  Governmental  Organizations. — There  are  many  Gov- 
ernment bureaus  for  securing  and  circulating  market  in- 


210  MARKETING 

formation.  The  oldest  and  best  known  of  the  bureaus  is 
the  Bureau  of  Crop  Estimates,  originally  called  the  Bureau 
of  Statistics,  in  the  Department  of  Agriculture.  On  Febru- 
ary 25,  1863,  the  first  appropriation  of  $90,000  was  made 
for  a  Department  of  Agriculture.  Two  years  later,  1865, 
the  first  distinct  provision,  $20,000,  was  made  for  a  statis- 
tical bureau.  By  1911  the  appropriation  had  reached 
$225,000. 

The  Bureau  of  Crop  Estimates  gathers  statistics  on  the 
four  great  staple  crops — corn,  cotton,  wheat  and  oats — and 
issues  monthly  reports.  These  reports  cover  the  following 
three  points:  (a)  the  area  in  acres  planted  or  sown,  (b) 
condition  of  crops,  examination  being  made  monthly  during 
growing  season,  and  (c)  the  yield  per  acre  at  harvest  time. 
Beginning  the  first  of  each  month  a  gathering  volume  of 
reports  will  flow  from  150,000  or  more  men  conversant  with 
conditions  throughout  the  productive  areas,  toward  the  of- 
fice of  the  Chief  of  the  Bureau  of  Crop  Estimates.  They 
will  carry  the  conditions  as  of  the  first  of  the  month.  The 
facts  will  be  tabulated,  State  by  State,  section  by  section. 
Then  as  the  eighth  of  the  month  draws  near,  the  doors  of 
the  rooms  where  the  material  is  kept  are  locked;  door- 
keepers are  stationed  outside;  even  the  telephone  is  dis- 
connected. The  statistical  experts  are  marooned  as  if  they 
had  the  plague. 

The  reports  on  these  crops  are  usually  "loosed"  at  two- 
thirty  in  the  afternoon.  As  this  time  approaches,  in  the 
corridors  are  gathered  fifteen  or  twenty  newspaper  report- 
ers. With  them  are  the  operators  of  the  telegraph  system, 
whose  instruments  stand  ready  at  hand.  One  minute  before 
the  hour  set,  the  doors  are  unlocked  and  out  step  the  Chief 
of  the  Bureau  of  Crop  Estimates  and  the  Secretary  of  Agri- 
culture. The  Chief  holds  in  his  hand  25  typewritten  copies 
of  the  completed  report.  Some  of  these  are  spread  on  a 
table,  printed  side  down.    Folded  copies  are  handed  to  the 


TRADE  INFORMATION  211 

telegraph  operators,  and  they  are  not  unfolded.  Each 
newspaper  man  is  then  permitted  to  place  his  hand  on  a 
copy,  ready  to  grab  and  run.  As  the  hands  of  the  clock 
reach  the  appointed  hour,  the  Chief  of  the  Bureau  shouts 
"Go!"  Within  less  than  five  seconds  every  reporter  has 
disappeared;  every  available  telephone  is  in  use,  and  the 
telegraph  wires  are  humming  the  message  of  that  report. 
Within  fifteen  or  twenty  seconds  it  is  being  read  in  Chicago, 
New  York,  New  Orleans,  and  thence  spreads  with  the 
speed  of  skillful  fingers  tapping  telegraph  instruments, 
public  and  private,  over  the  continent  and  across  the  seas. 

Why  all  this  careful  guarding?  What  is  the  dynamic 
power  in  this  simple  report?  The  answer  is:  Market 
News!  This  report  carries  the  summation  from  150,000 
different  sources  of  facts  about  crop  conditions,  of  corn, 
cotton,  wheat,  and  oats,  the  four  great  speculative  crops. 
The  world  price  is  made  of  such  stuff.  It  helps  to  keep  that 
price  balanced  to  world  conditions;  it  aids  in  holding  that 
price  down  to  a  minimum,  because  buyer  and  seller  both 
know  the  facts,  because  the  whole  world  may  know  them, 
because  it  becomes  world  news  and  rumor  is  killed. 

This  is  only  a  part  of  what  the  Government  does  for  the 
collection  and  dissemination  of  market  news.  The  Bureau 
of  Markets,  "to  give  producers,  dealers,  and  consumers 
more  complete  and  accurate  information  regarding  current 
production,  market  receipts,  accumulations  both  in  and  out 
of  storage  and  market  demands,"  has  developed  a  market 
news  service  respecting  such  commodities  as  grain,  hay, 
seeds,  eggs,  poultry,  cheese,  onions,  cabbage,  and  lettuce, 
as  well  as  meats  and  meat  animals.  "These  reports  tend 
very  materially  to  steady  market  conditions  by  giving  the 
producers  dependable  information  on  which  to  base  their 
business  operations." 

The  Bureau  of  Foreign  and  Domestic  Commerce  collects 
facts  about  foreign  markets  and  gives  them  out  to  interested 


212  MARKETING 

parties.  The  U.  S.  Geological  Survey  gathers  data  on  the 
production  and  on  the  deposits  of  minerals  and  ores.  The 
Department  of  Forestry  secures  data  on  timber  and  lum- 
ber supplies.  In  one  form  or  another  the  Government 
reaches  out  into  most  lines  of  interest  and  serves  as  a 
medium  of  market  news.  Of  no  small  importance  is  the 
Daily  Weather  Report. 

For  the  great  fundamental  crops  there  is  an  international 
organization.  It  was  instigated  by  an  American  economist, 
David  Lubin,  and  finally  organized  in  1909.  It  is  called 
the  International  Agricultural  Institute,  and  has  its  seat 
in  Rome.  The  work  of  this  Institute  is  carried  on  by  money 
appropriated  by  the  leading  nations  of  the  world,  and  the 
information  on  the  fundamental  crops  is  sent  broadcast 
monthly.  This  is  not  only  one  of  the  great  world-price 
stabilizers,  but  is  likewise  a  great  bulwark  against  want  and 
famine.  It  aids  in  distributing  these  essential  commodities 
as  they  are  needed,  territorially  and  chronologically. 

The  Government  can  act  only  in  the  interest  of  all  the 
people.  The  market  news  which  it  collects  must  be  freely 
given  to  all  at  the  same  time.  On  the  basis  of  such  com- 
mon information,  competition  resolves  itself  into  a  matter 
of  careful  judgment.  It  takes  away  the  monopoly  of  knowl- 
edge by  the  middlemen ;  it  places  in  the  hands  of  producers 
and  consumers  a  weapon  of  defense  and  of  offense.  It  is 
well  to  do  so. 

Internationally,  the  nations  are  becoming  more  closely 
knit  commercially.  The  International  Institute  has,  there- 
fore, a  distinct  service  to  perform.  The  Institute  thus  de- 
scribes its  function: 

The  establishing  of  this  Institute  is  one  of  the  examples  of 
the  cosmopolitan  nature  of  modern  industry.  It  is  a  finger  post 
pointing  to  the  day  when  the  world  will  be  one's  home  and  not 
the  circumscribed  boundaries  of  neighborhood,  state,  or  con- 
tinent.    Every  one  on  the  face  of  the  globe  is  in  competition 


TRADE  INFORMATION  213 

with  every  other  one,  and  yet  the  products  of  every  one  are  at 
the  command  of  every  one — at  a  price.  Commerce  is  interna- 
tional; markets  are  international;  economics  must  be  studied  as 
world-wide  in  its  application.  The  products  of  every  clime 
find  consumers  in  the  utmost  parts  of  the  earth,  and  those  who 
extend  their  knowledge  to  world  production  and  world  consump- 
tion are  the  only  ones  competent  to  handle  the  marketing  problems 
of  the  Twentieth  Century. 

150.  Private  Organizations. — Private  organizations  for 
securing  business  data  permeate  the  industrial  and  com- 
mercial world.  The  most  highly  organized  of  these  is  prob- 
ably that  of  the  grain  brokers.  In  such  trade  centers  as 
Chicago,  these  brokers  have  the  headquarters  of  organiza- 
tions reaching  throughout  the  grain-growing  regions. 
There  are  experts  who  make  telegraphic  reports  from  time 
to  time  on  crop  conditions,  and  especially  during  the  crit- 
ical seasons.  The  appearance  of  Hessian  fly,  or  rust,  or 
other  pest  is  quickly  noted  and  discounted  in  the  specula- 
tive market  price. 

The  largest  private  news  agency  in  the  grain  trade  is 
probably  Broomhall  's.  It  has  official  representatives  in  all 
of  the  great  exchanges.  "Advices"  are  received  from 
agents,  daily  and  weekly,  by  mail,  wire  and  cable.  There 
are  more  than  300  expert  agents  scattered  through  the 
grain  producing  countries.  Liverpool  is  the  clearing  house 
for  it.  News  can  be  sent  by  it  from  New  York  to  Liver- 
pool and  be  posted  in  six  minutes.  Among  private  organi- 
zations this  agency  corresponds  to  the  International  Agri- 
cultural Institute  in  governmental  organizations.  A  sim- 
ilar organization  for  cotton  is  found  in  the  International 
Cotton  Conventions. 

Stock  brokers  also  have  news  gathering  and  news  dis- 
tributing organizations.  This  service  is  largely  their  stock 
in  trade.    When  it  is  recalled  that  these  stock  brokers  are 


214  MARKETING 

dealers  in  contracts,  the  reason  is  plain.  They  need  to 
know  more  about  the  market,  about  demand  and  supply, 
than  their  clients. 

Every  commodity  of  sufficient  importance  industrially 
and  commercially  will  develop  its  own  trade-information 
agencies.  There  is  in  the  United  States  the  Iron  and  Steel 
Institute.  Abroad,  in  England,  France,  Germany,  there 
is  a  similar  organization.  The  oil  interests  keep  many  ex- 
perts busy  with  their  investigations  with  a  clearing  house 
in  the  Petroleum  Institute. 

Market  news  is  often  an  incidental  service  performed  by 
organizations  formed  primarily  for  other  purposes.  This 
is  true  of  the  trade  associations  that  have  multiplied  so 
rapidly  in  recent  years.  There  are  now  literally  thousands 
of  such  associations,  each  with  its  central  headquarters 
from  which  emanates  trade  information.  Many  secretaries 
of  these  organizations  send  out  news  letters,  call  conven- 
tions, make  investigations,  and  otherwise  try  to  keep  their 
members  in  the  vanguard  of  progress.  The  trade  journals 
issued  by  these  organizations  contain  much  trade  news. 
Some  of  them  are  published  solely  for  that  purpose. 

There  are  many-  research  departments,  both  in  the  trade 
associations  and  in  the  larger  businesses,  whose  prime  mo- 
tive is  to  furnish  pertinent  trade  facts.  They  are  agencies 
of  market  news.  Banks  have  organized  research  depart- 
ments also,  and  for  the  same  purpose.  Special  research 
companies  have  recently  sprung  up  to  serve  as  sources  of 
market  news. 

Special  market-news  magazines  and  papers  are  published. 
The  New  Orleans  Cotton  Exchange  Reporter,  Dun's  Re- 
view, Bradstreet's  Review,  Broomhdll's  Corn-Trade  News, 
commercial  and  financial  and  industrial  magazines  all 
carry  market  news,  as  fresh  and  up-to-date  as  possible. 
The  daily  papers  have  their  market  news  sections. 

Thousands  upon  thousands  of  letters  are  daily  carried  by 


TRADE  INFORMATION  215 

the  mail,  crammed  with  market  news.  The  correspondence 
of  the  world  is  doubtlessly  very  largely  made  up  of  trade 
information.  Just  as  advertising — which,  by  the  way,  is  a 
form  of  market  news  service — keeps  the  newspapers  and 
magazines  going  financially,  so  trade-information  corre- 
spondence saves  a  deficit  in  the  Post  Office  Department.  It 
is  not  competition,  but  market  news,  that  is  the  life  of 
trade. 

The  economics  of  the  telegraph  system  has  not  yet  been 
written.  Nor  has  that  of  the  telephone  system  or  the  wire- 
less been  written.  Much  has  been  said  about  the  laying  of 
ocean  cables,  but  the  romance  has  been  emphasized  more 
than  the  economic  significance.  Cables,  telegraph  wires, 
telephones,  and  wireless  outfits  bring  market  news  from 
the  ends  of  the  earth.  In  the  world  markets,  the  nation 
that  controls  the  cable  systems  has  the  means  of  controlling 
the  markets.  British  supremacy  in  foreign  trade  was 
founded  not  alone  upon  a  merchant  marine  and  foreign 
investments,  but  also  upon  her  world-encircling  cables. 
Adequate  overseas  communication  is  as  important  as  ships 
and  foreign  banks  to  successful  foreign  trade. 

Cables,  like  ships,  are,  in  times  of  peace,  supposedly 
employed  freely  in  the  service  of  the  world;  in  time  of 
war  they  are  at  the  disposal  of  the  government  where 
ownership  lies.  For  years  the  British  cable-rate  blanks 
have  carried  the  following  provisions:  "The  dispatches 
of  the  imperial  (British)  government  shall  have  priority 
when  demanded.  The  cable  must  not,  at  any  station, 
employ  foreigners;  and  the  lines  must  not  pass  through 
any  office,  or  be  subject  to  the  control  of  any  foreign 
government."  It  is  significant  in  this  connection  to  note 
that  only  a  single  line,  that  of  the  Compagnie  Franchise 
Cables  Telegraphiques,  which  does  not  touch  foreign  land, 
runs  between  the  United  States  and  Europe.    The  question 


216  MARKETING 

has  been  raised  and  will  rise  again  as  to  whether  or  not 
it  is  possible  to  neutralize  all  international  cable  lines. 

Steamboats  carried  news  faster  than  the  old  sailing 
vessels.  The  cable  easily  outdistances  the  steamer.  But 
the  cable  lines  are  relatively  expensive  and  afford  only  a 
restricted  means  of  communication.  Only  recently  another 
possible  means  of  transoceanic  communication  has  been 
opened  up.  An  airplane  successfully  crossed  the  Atlantic 
in  a  single  flight.  An  airship  has  made  a  successful  round 
trip.  There  is  already  much  speculation  as  to  the  pos- 
sibility of  this  medium  in  supplanting  to  a  very  consider- 
able extent  the  cable  in  carrying  messages  over  seas.  This 
initial  passage  of  the  airplane  was  made  in  sixteen  hours 
from  Newfoundland  to  Ireland.  The  crossing  is  so  much 
more  rapid  than  the  steamship  that  it  is  supposed  a  great 
part  of  commercial  communication  can  be  done  in  this  way. 

Essential  market  news  is  served  luxuriously  in  hotel, 
club,  or  office  by  means  of  that  marvelous  little  instrument 
called  the  "ticker."  Hitherto,  these  tickers  have  been 
the  quickest  method  of  transmitting  news  widely.  A 
private  telegraph  or  telephone  wire  gives  equal  speed,  as 
well  as  privacy,  but  a  single  master  transmitter  can  send 
the  important  news  out  to  many  of  these  little  tickers 
instantaneously.  "The  service  gives  out  news  to  the 
'Street'  where  it  is  most  needed,  for  without  an  up-to-the- 
minute  knowledge  of  what  the  outside  world  is  doing, 
rumor  is  much  more  likely  to  affect  the  sensitive  market. 
The  newspapers  with  their  hourly  editions  do  not  come 
often  enough.  The  news  must  come  hotter  and  faster 
than  these  possibly  can. ' ' 1 

Through  all  of  these  means,  private  and  governmental, 
trade  information  is  collected  and  distributed.  Gradually, 
faster  and  faster  methods  have  been  developed,  until  now 
the  news  flies  almost  with  the  speed  of  light.    This  market 

1  Technical  World,  vol.  xxi,  p.  264. 


TRADE  INFORMATION  217 

news  system  has  become  the  very  core  of  the  market 
organization,  in  every  respect  as  essential  as  the  railroad 
or  the  warehouse. 

151.  Essentials  of  Market  News. — There  are  two  general 
phases  of  trade  information;  one  has  to  do  with  produc- 
tion, the  other  with  the  demand.  In  those  essential 
products  with  a  world-wide  and  relatively  inelastic  demand, 
the  attention  turns  toward  production.  Thus,  crop  reports 
sent  out  by  the  Government  deal  with  (1)  acreage  planted, 
(2)  condition  of  crops  during  growing  season,  (3)  yield 
per  acre,  (4)  total  production,  (5)  average  prices  per 
bushel,  (6)  total  farm  value,  (7)  stocks  on  hand  at  given 
times,  (8)  amount  shipped  out  of  country  of  production, 
(9)  concise  statements  of  weather  conditions  throughout 
the  productive  area,  and  (10)  the  "visible  supply." 

As  has  been  pointed  out  before,  it  is  important  to  trace 
the  relation  between  the  volume  of  production,  the  total 
value,  and  the  visible  supply.  This  last  term  signifies,  in 
general,  the  amount  within  sight  of  the  market ;  that  is,  the 
amount  in  elevators,  on  board  cars,  loaded  on  ships,  etc. — 
the  amount  that  has  been  charted.  The  visible  supply 
becomes  increasingly  important  as  the  end  of  the  crop 
season  draws  near.  The  amount  of  wheat  left  at  the  end 
of  May,  the  bales  of  cotton  remaining  after  August  31, 
the  number  of  bushels  of  corn  left  after  September,  show 
the  real  surplus  of  the  previous  crop  to  compete  with  the 
new  crop. 

For  other  commodities,  other  points  may  rise  in  im- 
portance. The  driving  of  new  oil  wells,  the  opening  of 
new  mines,  the  total  production  of  ore,  coal,  lumber,  the 
recent  estimates  by  experts  of  remaining  supplies,  are  all 
pertinent. 

But  production  figures  are  significant  only  in  relation 
to  demand.  This  may  mean  the  demand  for  finished 
products  reflected  back  to   raw   materials.     It   certainly 


218  MARKETING 

includes  the  results  of  a  careful  analysis  of  the  market. 
The  chief  elements  of  this  analysis  have  already  been  dis- 
cussed. The  principle  to  keep  in  mind  is  that  any 
pertinent  fact,  touching  either  the  production  of  a  com- 
modity or  its  consumption,  is  trade  information,  and  may 
become  an  influence  in  affecting  market  price,  and  that 
a  market  price  at  any  given  moment  is  an  understanding 
of  supply  in  relation  to  demand  on  the  basis  of  known 
trade  information. 

152.  Control  of  Trade  Information. — So  fundamentally 
important  is  trade  information  in  the  intelligent  direction 
of  industry,  so  tremendous  the  advantage  in  a  monopoly 
of  essential  trade  facts,  that  the  question  of  control  arises. 
Should  the  machinery  for  the  collection  and  distribution 
of  market  news  be  left  to  private  control?  The  grain 
brokers  have  such  an  efficient  organization  for  securing 
news  that  they  can  keep  at  least  two  weeks  ahead  of  Gov- 
ernment sources.  This  means  that  all  of  the  reports  on 
the  great  speculative  crops  that  are  given  out  on  the 
eighth  of  each  month  by  the  Department  of  Agriculture 
have  already  been  discounted  in  the  market.  The  producer 
or  buyer  who  does  not  have  such  an  organization  may  there- 
fore feel  at  a  great  disadvantage  in  bargaining. 

In  this  connection  it  is  important  to  inquire  where  the 
market  price  is  really  determined;  whether  in  that  market 
center  through  which  the  bulk  of  the  commodities  passes 
or  in  that  market  center  where  the  market  news  is  con- 
centrated? Specifically,  is  the  world-price  of  wheat  de- 
termined in  Chicago,  Minneapolis,  Duluth,  or  in  Liverpool ; 
is  the  world-price  of  cotton  determined  in  New  Orleans, 
New  York,  or  Liverpool,  or  Manchester ;  is  the  world-price 
of  copper  or  steel  determined  in  New  York  or  abroad;  is 
the  world-price  of  wool  determined  in  Boston  or  London; 
is  the  world-price  of  petroleum  determined  in  the  United 
States  or  abroad;  is  the  price  of  coffee  determined  in  Sao 


TRADE  INFORMATION  219 

Paulo  or  in  New  York?  In  a  sense  these  queries  are 
academic  in  character,  because  a  market  price  may  be 
built  up  by  adding  transportation,  handling  and  storage 
charges,  or  may  be  taken  apart  by  deducting  them.  That 
is,  the  Liverpool  price  may  be  the  Chicago  price,  plus 
charges,  or  the  Chicago  price  may  be  the  Liverpool  price, 
less  charges. 

There  is  a  point  here  worth  considering.  Does  physical 
control  over  a  substantial  quantity  of  a  commodity  give 
the  advantage  over  a  superior  knowledge  of  the  world  news  ? 
The  problem  is  easily  solved.  Marketing  is  a  going  con- 
cern, and  price  adjustments  are  made  on  the  basis  of  news. 
Where  that  news  is  concentrated  will  be  found  the  dominant 
price  factors.  It  follows,  too,  that  a  combination  of  physical 
control  and  market  news  is  doubly  strong.  In  Bremen, 
Germany,  was  the  center  of  the  world's  copper  market, 
because  it  was  the  center  of  the  world's  copper  news.  If  the 
cables  of  the  world  are  centered  in  Great  Britain,  there 
will  be  found  the  dominant  world-price  factors.  Banking, 
shipping,  trade,  will  follow.  Advance  news,  even  if  only 
by  a  matter  of  seconds,  permits  the  discounting  in  terms 
of  price. 

It  is  clear,  then,  that  a  real  question  does  exist  as  to 
whether  or  not  individuals  or  governments  should  have 
control  of  the  machinery  for  collecting  and  distributing 
market  news.  The  United  States  endeavors  to  make  the 
essential  crop  news  common  property,  so  that  the  humblest 
producer  may  read  in  the  paper  the  same  facts  as  the 
cleverest  broker.  The  International  Agricultural  Institute 
is  trying  to  make  this  service  international.  Like  all  other 
industries,  that  of  dealing  in  market  news  will  be  declared 
a  public  utility  when  the  people  realize  its  true  significance. 

153.  Discounting  the  Future. — Buying  and  selling 
future  contracts  is  like  crossing  a  bridge  before  one  gets 
to  it.    There  is  a  calculation  of  what  will  happen;  it  is  a 


220  MARKETING 

ease  where  coming  events  cast  their  shadows  before  them. 
Future  dealings  are  really  the  shock  absorbers  in  business. 
In  our  modern  roundabout  business,  speculation,  that  is, 
buying  and  selling  future  contracts,  is  absolutely  neces- 
sary. When  this  speculation  is  rendered  as  intelligent  as 
possible  through  a  study  of  trade  information,  the  fluctua- 
tions in  market  prices  are  leveled  out  and  the  risks  of 
business  are  minimized.  This  is  a  most  important  service. 
It  has  often  been  observed  that  the  actual  transpiration 
of  an  event  does  not  have  the  effects  upon  the  sensitive 
exchanges  that  might  have  been  expected  from  its  sig- 
nificance. This  is  due  to  the  fact  that  its  effects  have 
been  anticipated  and  discounted.  The  anticipation  of 
effects  is  discounting  the  future.  The  stabilizing  results, 
beneficial  to  producer,  to  middleman,  to  consumer,  in  the 
reduced  risks  of  business,  are  due  to  market  news. 

154.  Trade  Information  and  Competition. — Competi- 
tion in  trade  may  be  based  upon  the  effort  to  secure  better 
trade  information  or  upon  the  effort  to  judge  most  ac- 
curately the  effects  of  market  news.  The  former  kind  is 
inevitable  under  private  individualistic  competition,  where 
private  enterprise  is  superior  to  public  enterprise  in  secur- 
ing the  essential  business  facts.  In  some  cases  the  govern- 
ment can  maintain  an  organization  of  a  magnitude  that  is 
impracticable  for  private  enterprise.  The  German  govern- 
ment had  a  system  for  securing  information  from  all  parts 
of  the  world,  through  foreign  trade  agents,  foreign  branch 
banks,  government  agents,  missionaries,  emigrants,  steam- 
ship companies,  beyond  anything  an  individual  firm  could 
do.  No  British  business  firm  could  match  the  resources  of 
the  British  Board  of  Trade.  No  American  firm  has  the 
potential  power  of  our  consular  and  trade-commissioner 
service. 

The  danger  of  leaving  market  news  to  private  control 
lies  in  the  abuse  of  its  power.    In  the  market  it  is  literally 


TRADE  INFORMATION  221 

time  that  knowledge  is  power.  During  the  month  of  July, 
1916,  favorable  reports  were  pouring  into  the  Chicago 
Board  of  Trade  as  to  the  condition  of  the  spring  wheat 
crop  in  the  Northwest.  One  day  a  certain  brokerage  firm 
got  a  telegram  from  an  expert  at  a  small  town  in  Nebraska. 
Immediately,  a  member  of  the  firm  boarded  a  train  for 
that  place.  Upon  his  arrival,  he  hired  a  powerful  motor 
car  and  started  to  drive  northward  through  the  spring 
wheat  region.  With  practised  eye  he  examined  field  after 
field  for  signs  of  rust,  of  which  the  telegram  had  spoken. 
After  a  trip  of  ninety  miles  or  more  he  stopped,  for  the 
signs  had  ceased.  But  this  expert  had  discovered  enough ; 
he  knew  that  the  fatal  rust  was  rapidly  spreading  north 
through  the  entire  region,  and  that  if  the  hot  moist  weather, 
with  a  prevailing  south  wind,  persisted  a  large  part  of 
that  important  crop  was  doomed.  He  telegraphed  this 
news  to  his  firm. 

With  this  information  that  brokerage  firm  in  a  few 
minutes  could  capitalize  its  position  to  the  limit.  It  was 
a  monopoly  for  a  brief  space  of  time,  as  complete  as 
monopoly  can  be.  Its  power  was  as  great  as  that  of  a 
"corner"  in  the  market,  while  it  lasted.  Is  this  only  a 
part  of  legitimate  competition?  There  is  no  question  of 
false  information,  of  "tips"  from  unreliable  sources.  This 
is  not  a  "bucket  shop"  method.  But  it  is  still  an  open 
question  as  to  whether  or  not  private  competition  should 
extend  this  far. 

155.  Use  and  Abuse  of  Trade  Information. — There  is,  of 
course,  a  right  use  and  a  wrong  use  of  market  news.  In 
all  cases  the  news  should  be  reliably  true.  Falsification,  by 
exaggeration  or  by  depreciation,  can  never  be  right. 
Organized  exchanges  have  very  strict  rules  in  this  regard, 
because  they  have  learned  by  the  bitter  experience  of  public 
disapproval  that  honesty  is  the  best  policy.  It  is  not  de- 
fensible, either,  to  issue  reports  as  fresh  that  have  already 


222  MARKETING 

been  discounted  in  the  market.  The  news  coming  through 
the  "ticker"  service  is  condemned  by  the  experts  on  the 
exchanges  as  "gossip,"  because  the  facts  have  already 
passed  through  the  hands  of  those  who  have  had  every 
reason  to  use  them  for  their  own  advantage. 

It  is  easy  to  start  a  rumor  in  an  uncertain  market,  and 
unfounded  reports  have  a  remarkable  tendency  to  grow 
fast.  Any  "manipulation"  of  this  sort  is  to  be  utterly 
condemned.  Nothing  can  insure  the  right  use  of  market 
news  besides  an  unswerving  honesty  and  integrity.  The 
individual  may  be  able  to  escape  with  the  plunder  derived 
from  false  reports,  but  the  institution  through  which  he 
works  will  sooner  or  later  have  to  bear  the  responsibility. 
Stock  markets  testify  to  this  fact,  as  do  also  commission 
merchants.  The  evil  practice  of  one  man  may  undo  the 
good  work  of  a  score  of  other  men.  This  statement  is 
peculiarly  true  in  the  use  of  market  news. 

156.  Market  News  as  a  Business  Force. — It  must  be 
realized  clearly  that  market  news  is  not  in  itself  either  a 
function  or  an  institution;  it  is  an  active  force,  an  active 
business  force,  subtle,  intangible,  pervasive.  It  is  a  motive 
power  of  judgment.  "Carriers  may  be  provided  to  trans- 
port the  crops  to  market ;  local,  central,  and  retail  markets, 
elevators  and  warehouses,  exchanges  and  other  market 
places  to  facilitate  their  storage,  preparation  and  sale ;  but 
without  authentic  current  trade  information  the  machinery 
of  distribution  could  not  but  operate  in  a  haphazard 
manner,  and  prices  would  seldom,  if  ever,  be  such  as  the 
actual  or  probable  supply  and  demand  naturally 
warrant. ' ' 2 

Market  news,  while  not  a  function  in  itself,  performs 
a  most  essential  commercial  function.  It  is  an  organizing, 
directive  force;  it  is  an  intelligent  use  of  business  facts 
for  the  purpose  of  business  management.   Under  a  regime 

*  Huebner,  Agricultural  Commerce,  p.  293. 


TRADE  INFORMATION  223 

of  individual  enterprises,  men  do  what  pays  best,  or  what 
they  think  pays  best.  The  determination  of  what  pays 
best  is  based  on  the  individual's  interpretation  of  trade 
information  as  he  knows  it.  This  applies  both  to  industry 
and  to  trade.  More  and  more,  commodities  are  being 
diverted  en  route,  on  telegraphic  advice  as  to  market  con- 
ditions in  certain  trade  centers ;  more  and  more,  producers 
whether  farmers,  manufacturers,  or  mine  operators  are 
directing  their  operations  by  market  news.  Through  the 
medium  of  market  news  the  economic  process  from  begin- 
ning to  end  becomes  more  intelligent. 

An  increasing  factor  in  market  news  is  the  knowledge 
gained  from  scientific  research.  "The  chemical  laboratory 
is  now  a  necessary  part  of  every  steel  plant,  fertilizer  fac- 
tory, and  dye  works.  Manufacturers  in  every  field,  seeking 
to  better  the  quality  of  their  products  or  to  reduce  costs, 
have  found  the  services  of  the  chemical  engineer  indis- 
pensable. Old  rule-of-thumb  methods  have  been  scrutinized 
in  the  light  afforded  by  scientific  experimentation,  and 
great  improvements  have  been  made  in  fundamental  proc- 
esses, especially  in  the  utilization  of  by-products  that  had 
been  considered  waste  and  discarded."3 

Market  news  is,  therefore,  not  only  an  organizing  and 
directive  force,  but  also  a  conserving  force. 

Suggestions  for  Study 

The  student  should  now  investigate  the  machinery  that 
has  been  developed  for  collecting  and  circulating  trade 
information  on  his  chosen  commodity.  For  class  room  dis- 
cussion the  following  topics  will  serve : 

1.  Market  news  as  a  directing  force  in  business. 

2.  Development  of  market  news  agencies. 

3.  Business  barometers. 

•Smith,  Strategy  of  Minerals,  p.  212. 


224  MARKETING 

4.  Prophesying  the  future  of  business  conditions. 

5.  Scientific  analysis  of  business  facts. 

6.  Translating  business  facts  into  prices. 

7.  Market  news  for  producers. 

8.  Market  news  in  the  bargaining  process. 

9.  Trade  information  and  the  middleman. 

10.     Trade  information  as  a  specialized  function. 

Readings  : 

U.  S.  Bureau  of  Crop  Estimates,  Farmer's  Bulletin  No.  581. 

Monthly  Crop  Report. 

Circular  17,  Government  Crop  Reports. 
U.  S.  Census  Oflice,  Bulletin  125. 

Monthly,  bi-monthly,  annual  reports. 
U.  S.  Weather  Bureau,  Monthly  Weather  Review. 
Bureau  of  Foreign  and  Domestic  Commerce,  Commerce  Reports. 
International  Agricultural  Institute,  Monthly  Report. 
Broomhall's  Corn-Trade  News. 
Dunn's  Be  view. 
Bradstreet's  Review. 
"Current  Sources  of  Information  in  Produce  Markets,"  Annals 

of  the  American  Academy  of  Political  and  Social  Science, 

September,  1911. 
"The    Crop    Reporting    System,"    Annals    of    the    American 

Academy  of  Political  and  Social  Science,  September,  1911. 
Babson's  Desk   Sheet   of  Tables   on  Barometric  Figures   and 

Business  Conditions. 
Duncan,  Commercial  Research,  Chaps.  IV,  IX. 
Journal  of  Commerce,  New  York. 
Commercial  and  Financial  Chronicle. 
Daily  papers. 
Massachusetts   State  Board  of  Agriculture,   Circular  No.  76, 

"The  Value  of  Market  News  Service  to  Fanners  and  Fruit 

Growers." 


CHAPTER  XI 

MARKET   PRICE 

The  forces  of  supply  and  demand  meet  in  the  market 
and  culminate  in  a  market  price.  The  value  of  a  com- 
modity is  there  expressed  in  terms  of  the  medium  of 
exchange,  that  is,  in  terms  of  money;  legal  title  passes 
from  one  individual  to  another,  and  along  with  it  the 
risks  and  responsibilities.  Commodities  may  be  sold  many 
times  before  they  reach  the  consumer.  At  the  other 
extreme  are  the  raw  materials  that  enter  into  a  finished 
product  without  being  quoted  in  the  market.  In  every 
case,  charges  are  running  constantly  against  commodities 
while  they  remain  in  the  economic  process.  There  is,  there- 
fore, a  series  of  price  steps  or  margins. 

Market  prices  may  take  their  names  from  the  market  in 
which  they  are  quoted  or  from  the  dealers  who  quote  them. 
In  the  former  case,  there  are  local  prices  and  wholesale 
market  prices.  In  the  latter  case,  there  are  producers' 
prices,  farm  prices,  wholesalers'  prices,  retailers'  prices, 
consumers'  prices.  If  these  latter  prices  are  followed 
through  step  by  step,  the  final  composite  price  can  be  more 
clearly  understood.  It  is  proposed  here  to  discuss  the 
subject  from  this  point  of  view. 

157.  Price  Factors  and  Influences. — A  comprehensive 
view  may  first  be  taken  of  the  complex  of  factors  and 
influences  which  enter  into  market  prices.  It  is  not  pos- 
sible to  name  them  all,  because  they  not  only  differ  at 
different  times,  but  some  of  them  are  too  subtle  and  in- 

225 


226  MARKETING 

tangible  to  be  isolated  and  defined.     The  following  state- 
ment may  be  taken  as  a  fairly  comprehensive  one : 

No  attempt  has  been  made  to  investigate  the  causes  of  the 
rise  and  fall  of  prices.  The  aim  has  been  to  give  only  the 
prices  as  they  actually  prevailed  in  the  market  and  such  sum- 
maries thereof  as  appear  necessary.  The  causes  are  too  complex, 
the  relative  influence  of  each  too  uncertain,  in  some  cases  involv- 
ing too  many  economic  questions,  to  permit  their  discussion  in 
the  present  report.  An  enumeration  of  some  of  the  influences 
that  cause  changes  in  prices  may  be  of  interest,  however.  Such 
influences  include  variations  in  harvest,  which  not  only  contract 
or  expand  the  supply  and  consequently  tend  to  increase  or  de- 
crease the  price  of  a  commodity,  but  also  decrease  or  increase, 
to  a  greater  or  less  degree,  the  purchasing  power  of  such  com- 
munities as  are  dependent  in  whole  or  in  part  upon  such  com- 
modity; changes  in  demand  due  to  changes  in  fashions,  seasons, 
etc.;  legislation  changing  internal-revenue  taxes,  import  duties, 
or  bounties;  inspection  as  to  purity  or  adulteration;  use  of  other 
articles  as  substitutes — as,  for  instance,  an  advance  in  the  price 
of  beef  will  cause  an  increased  consumption  of  pork  and  mutton 
and,  it  may  be  added,  a  probable  increase  in  the  price  of  both 
pork  and  mutton;  improvements  in  methods  of  production  which 
will  tend  to  give  either  a  better  article  for  the  same  price  or 
an  equal  article  for  a  lower  price;  cheapening  of  transportation 
or  handling;  speculative  manipulation  of  the  supply  or  of  the 
raw  product;  commercial  panic  or  depression;  expanding  or  con- 
tracting credit;  overproduction;  unusual  demand  owing  to  dis- 
putes between  labor  and  capital  in  industries  of  limited  producing 
capacity,  as  in  the  anthracite  coal  industry;  organization  or 
combination  of  mills  or  producers,  thus  enabling,  on  the  one 
hand,  a  greater  or  less  control  of  prices  or,  on  the  other  hand, 
economies  in  production  or  in  transportation  charges  through 
the  ability  to  supply  the  article  from  the  point  of  production 
or  manufacture  nearest  the  purchaser.  No  conclusion  can  be 
formed  safely  as  to  causes  without  an  examination  of  the  pos- 
sible influence  of  several — in  some  cases  perhaps  all — of  these 
causes.     For  example,  the  various  internal-revenue  and   tariff 


MARKET  PRICE  227 

acts  have,  in  a  marked  degree,  no  doubt,  affected  the  prices  of 
proof  spirits,  of  tobacco,  and  of  sugar;  but,  on  the  other  hand, 
they  have  not  been  alone  in  their  influences,  and  it  probably 
would  not  in  all  cases  be  accurate  to  give  the  change  of  tax  or 
duty  as  representing  the  measure  of  a  certain  and  definite 
influence  on  the  prices  of  those  commodities.1 

The  theorist  goes  far  beyond  these  factors  and  influences. 
"Back  of  these  causes  lie  other  causes,  multiplying  end- 
lessly as  we  proceed  backward.  But  if  we  trace  back  all 
of  these  causes  to  their  utmost  limits,  they  will  all  resolve 
themselves  into  changes  in  the  marginal  desirability  or 
undesirability  of  satisfactions  and  of  efforts,  respectively, 
at  different  points  of  time,  and  in  the  marginal  rate  of 
impatience  as  between  any  one  year  and  the  next."  2 

The  following  causes  have  also  been  enumerated  in  the 
order  of  their  importance  in  affecting  commodity  prices: 
"(1)  Increase  of  gold  supply,  (2)  exhaustion  of  natural 
resources,  (3)  rising  standard  of  living,  (4)  withdrawal 
of  population  from  agriculture,  and  growth  of  cities, 
(5)  trusts  and  combinations,  (6)  tariffs,  (7)  labor  unions, 
(8)  growth  of  population  and  unscientific  methods  of  farm- 
ing, (9)  extravagance  in  expenditure,  (10)  waste  and  fraud 
in  distribution,  (11)  uneconomical  marketing  and  house- 
keeping, (12)  speculation,  (13)  immigration."3 

But  it  is  not  to  be  understood  that  these  or  any  other 
set  of  factors  and  influences  enter  consciously  into  the  con- 
struction of  every  price,  or  indeed  of  any  price.  The  prac- 
tical fact  to  be  remembered  is  that  business  is  a  going 
concern,  that  price  making  is  a  progressive  affair,  that  no 
price  in  the  market  to-day  is  built  from  the  foundation 
up,  that  to-day's  price  is  yesterday's  price  modified  only 

1U.  S.  Bureau  of  Labor  Statistics,  Bulletin  No.  114,  p.  22. 
'Fisher,  Elementary  Principles  of  Economics,  p.  409. 
'  Babson,  The  Annals  of  the  American  Academy  of  Political  and 
Social  Science,  September,  1911,  p.  174. 


228  MAEKETING 

by  some  bit  of  market  news.  In  the  long-time  period,  every 
factor  and  influence  will  have  full  effect,  but  from  day  to 
day  there  is  only  a  step  at  a  time. 

All  economic  forces  are  finally  concentrated  in  market 
price.  Here  is  found  the  composite  opinion  of  the  best 
business  minds,  which  have  transmuted  market  news  into 
the  dollars  and  cents  of  price.  This  is  the  higgling  of  the 
market ;  it  is  the  meeting  of  the  minds  of  buyer  and  seller « 
it  is  the  economic  consummation  so  devoutly  to  be  wished. 

158.  Local  Market  Price. — The  first  price  set  upon  com- 
modities in  the  local  market  may  be  called  the  local-market 
price,  or  farm  price  or  the  price  at  the  source.  It  is  clear 
that  the  minimum  at  which  this  price  can  run  for  a  long 
period  is  the  cost  of  production.  Farm  experts  have 
claimed  for  several  years  that  farmers  have  been  selling 
the  fertility  of  their  soil ;  it  has  often  been  estimated  that 
the  local  price  received  for  petroleum  and  for  gold  and 
silver  has  been  less  in  total  sum  than  the  amount  of  money 
spent  in  drilling,  mining,  and  prospecting.  Generally 
speaking,  however,  the  local-market  price  must  at  least 
cover  the  cost  of  production,  in  so  far  as  this  is  known. 

In  the  case  of  such  a  commodity  as  grain  or  cotton,  how- 
ever, the  cost  of  production  is  so  difficult  to  determine 
and  varies  so  greatly  from  season  to  season  and  from  sec- 
tion to  section  that  the  growers'  cost  of  production  does 
not  directly  determine  the  local  prices.  Rather  the  dealers 
will  usually  deduct  from  the  primary-market  price  the 
freight  charges,  plus  an  added  number  of  cents  per  bushel 
or  bale  to  cover  all  expenses  for  handling  and  including 
a  commission  or  profit.  Thus,  Kansas  wheat  that  was 
quoted  in  Kansas  City  at  97  cents  per  bushel,  "spot"  price, 
brought  in  the  local  market  87%  cents.  The  freight  was 
5  cents,  the  elevator  charge  3  cents,  and  commission 
and  other  charges  l1/^  cents.  In  another  case,  on  Sep- 
tember 28,  1914,  "an  elevator  which  allows  a  margin  of 


MARKET  PRICE  229 

3  cents  per  bushel  on  all  wheat  purchased,  received  several 
track  bids  averaging  90^  cents  per  bushel,  basis  No.  2 
hard,  which  is  the  contract  grade  in  Kansas.  The  quota- 
tion to  farmers  on  this  day  was  the  'on  track'  price 
quoted  the  elevator,  less  its  margin  of  3  cents,  or  in  this 
case  making  the  price  to  the  farmer  86%  cents  per 
bushel."4 

The  average  cost  to  haul  grain  to  local  market,  as  esti- 
mated by  the  Department  of  Agriculture  in  1906,  was 
9  cents  per  100  pounds.  ' '  The  average  cost  for  hauling  all 
farm  produce  to  market  is  about  eleven  cents  per  hundred- 
weight. ' ' 5 

In  a  similar  way  the  local  price  of  cotton  may  be  deter- 
mined by  the  Liverpool  price.  If  the  Liverpool  price  is, 
say,  six  pence,  or  12  cents,  charges  may  be  deducted 
for  tare,  inland  freight,  compressing,  ocean  freight,  insur- 
ance, expenses  of  doing  business,  profit,  totaling  about 
2  1/10  cents.  By  subtracting  this  latter  sum  from  12  cents 
the  farmer's  price  will  be  9  9/10  cents. 

A  special  commission  was  appointed  by  the  U.  S.  Food 
Administration,  in  the  Chicago  market,  to  determine  the 
proper  price  to  be  paid  to  milk  producers  so  as  to  cover 
the  cost  of  production  plus  a  fair  profit.  The  items  of 
cost  considered  by  the  commission  were  as  follows:  grain, 
silage,  hay,  bedding  and  roughage,  and  labor  per  100 
pounds  of  milk.  A  profit  of  ten  per  cent  was  added  to 
the  cost.  This  was  an  instance  of  calculating  logically  the 
local  market  price  from  the  ground  up. 

What  may  be  termed  the  local  price  of  coal  includes 
resource  cost,  or  what  is  charged  against  the  marketed 
product  as  the  value  of  the  coal  in  the  ground,  and  the 
mining  cost  or  charges  for  wages,  supplies,  power,  over- 
head and  selling  costs  paid  by  the  coal  operators.    "This 

*  House  Document  1271,  63d  Congress,  3d  Session,  p.  5. 
6  Adams,  Marketing  Perishable  Farm  Products,  p.  58. 


230  MARKETING 

cost  plus  the  resource  cost — the  royalty  or  depletion  charge 
— and  the  profit  or  loss  on  the  sale  make  up  the  value  at 
the  mine  mouth."  It  was  estimated  by  experts  that  the 
mining  cost  of  bituminous  coal  was  one  dollar  per  ton 
and  of  anthracite  $1.86  in  1909.  The  resource  cost  on 
anthracite  has  been  calculated  to  be  about  32  or  35  cents 
per  ton,  on  bituminous  about  five  cents  per  ton. 

From  this  brief  survey  of  local  prices  several  important 
points  may  be  illustrated.  In  the  first  place,  commodities 
with  a  world  market  are  acted  upon  by  world  forces  and 
local  prices  are  often  determined  by  deductions  from  the 
central-market  price.  This  is  an  instance  where  the  su- 
periority of  market  news  is  revealed.  Generally,  the  local 
producer  has  little  or  no  conception  of  the  bewilderingly 
intricate  cross-currents  of  forces  that  make  up  the  world 
price.  Or  again,  as  the  value  of  cost  accounting  is  under- 
stood better  the  local  price  may  tend  to  be  adjusted  to  the 
cost  of  production  plus  a  sufficient  profit  to  secure  adequate 
output.  The  lack  of  accurate  information  in  general  on 
the  part  of  producers  renders  them  more  or  less  helpless 
in  bargaining;  the  price  is  usually  determined  for  them 
and  not  by  them.  The  need  for  more  complete  analysis  of 
costs  is  patent  here. 

159.  Primary  and  Terminal  Market  Price. — As  goods 
pass  from  the  local  market  to  the  primary  and  terminal 
market,  they  enter  the  wholesale  market  system.  Here 
there  is  a  high  type  of  organization,-  trained  mind  meets 
trained  mind ;  knowledge  is  pitted  against  knowledge.  The 
great  forces  of  demand  and  supply  work  here  under  the 
most  intelligent  direction.  The  wholesale  prices  are  the 
standard  in  accordance  with  which  practically  all  other 
prices,  especially  of  agricultural  commodities,  are  gauged. 
"Wholesale  prices  are  more  susceptible  to,  and  they  more 
accurately  conform  to,  the  various  elements  affecting  de- 
mand and  supply  than  do  either  retail  or  farm  prices." 


MARKET  PRICE  231 

It  is  practically  impossible  to  ferret  out  all  of  the  in- 
fluences that  are  at  work  upon  the  wholesale  market  prices. 
There  is  no  single  price;  for  prices  are  composites;  they 
are  the  result  of  complex  action.  To  escape  a  bewilder- 
ing maze,  it  is  necessary  to  keep  in  mind  the  fact  that 
the  price  of  to-day  is  really  an  inheritance  of  past  years, 
that  prices  tend  to  persist  unless  there  is  tangible  reason 
for  change,  that  the  true  difficulty  is  to  transmute  an  item 
of  news  into  terms  of  price.  Some  change  in  the  field  of 
production  or  in  the  field  of  consumption  will  spread  by 
direct  or  by  indirect  influence  through  the  entire  system, 
becoming  less  and  less  as  it  spreads.  For  the  wholesale 
market  price  is  a  system  with  no  logical  beginning  or  end. 

The  aim  of  any  one  seeking  to  understand  the  wholesale 
price  of  any  given  commodity  should  be  to  isolate  the  con- 
trolling factors.  The  purchasing  department  of  a  large 
cereal  manufacturing  concern,  in  order  to  master  the  whole- 
sale-price factors  in  the  primary  market  for  grain,  plotted 
those  prices  from  1869  onward,  accounting  as  fully  as  pos- 
sible for  every  fluctuation.  With  this  analysis  it  became 
possible  to  work  more  intelligently  toward  foreseeing  the 
trend  of  prices,  for  the  price  of  the  day  has  a  relation  to 
past  prices  and  to  future  prices. 

The  future  price  is  a  speculative  price  in  the  sense  that 
many  influences  are  uncertain,  but  even  in  such  a  price 
it  is  possible  to  ascertain  constant  factors.  Some  kind  of 
a  charge  is  always  running  against  commodities  until  they 
are  consumed.  The  December  quotation  for  May  wheat 
will  differ  from  the  "spot"  price  by  at  least  enough  to 
cover  storage  and  insurance.  In  the  case  of  a  perishable 
commodity,  such  as  eggs  or  apples,  there  will  be  added 
to  the  storage  and  insurance  an  item  for  deterioration. 
The  calculable  charges  against  a  shipment  of  cotton  will 
include  the  following:  freight  from  interior  point,  com- 
pressing, ocean  freight,  fire  and  marine  insurance,  wharf- 


232  MARKETING 

age  and  dock  dues,  storage,  weighing,  sampling,  inspection, 
brokerage  and  commissions,  exchange  supervision,  weight 
franchise,  foreign-exchange  brokerage,  patching,  repairing, 
bagging,  interest,  expenses  for  wages,  cables,  telegraph. 
With  all  of  these  charges,  the  whole  cost  to  Liverpool, 
before  the  World  War,  was  not  over  one  cent  per  pound. 

It  is  clear  that  the  performance  of  every  function  in  the 
marketing  process  is  a  charge  against  each  commodity. 
The  more  difficult  and  hazardous  the  function  the  higher 
the  charge.  Time  and  place  values  are  greater  for  perish- 
ables than  for  coal  or  pig  iron.  Take  an  example  of  citrus 
fruit.  The  cost  per  dozen  of  marketing  California  oranges 
in  eastern  markets  based  on  an  assumed  retail  price  of 
40  cents  per  dozen  shows  that  the  grower  receives  10.7 
cents,  picking  and  hauling  to  packing  house  cost  1  cent, 
the  packing  house  cost  is  2.9  cents,  freight  and  refrigera- 
tion cost  8.2  cents,  the  grower's  selling  cost  is  0.6  cent, 
and  the  jobber's  margin  is  3.3  cents.6 

The  wholesale  market  is  the  scene  of  the  adjustment 
between  demand  and  supply.  The  big  packers  of  meat 
in  Chicago  stand  in  a  strategic  position  between  the  pro- 
ducers and  the  wholesale  market.  It  is  only  natural  that 
the  price  offered  by  them  for  livestock  coming  into  the  stock 
yards  should  be  affected  by  their  telegraphic  reports  from 
their  branch  distributing  houses.  In  general,  the  livestock 
sellers  know  neither  side  of  the  story  thoroughly.  They 
feel,  therefore,  at  a  disadvantage  in  bargaining.  The 
packers,  too,  by  long  experience  know  to  a  nicety  the  effect 
upon  the  flow  of  livestock  to  market  of  each  price  change. 
In  so  far  as  possible  the  price  they  offer  brings  in  the 
quality  and  quantity  for  their  weekly  "packs." 

A  tabulation  of  livestock  prices  in  comparison  with  the 
wholesale  prices  of  meat  for  1914  and  1915  showed  for 
cattle  and  beef  the  following  facts:      (1)    The  wholesale 

0  Powell,   Western  Fruit  Jobber,  April,  1915. 


MARKET  PRICE  233 

meat  price  is  far  more  sensitive  than  the  livestock  price 
in  the  stockyards,  to  changing  conditions.  (2)  The  price 
sometimes  rises  in  the  face  of  increasing  supply.  (3) 
Prices  sometimes  fall  when  the  receipts  show  no  general 
increase  and  even  when  the  receipts  are  on  the  decrease. 
(4)  Prices  sometimes  remain  practically  constant  through 
a  period  of  increasing  or  of  decreasing  receipts.  (5)  Prices 
in  the  wholesale  meat  market  are  more  sensitive  to  changes 
in  the  market  for  meat,  and  move  more  nearly  in  sympathy 
with  these  changes,  than  they  respond  to  changes  in  receipts. 
(6)  The  price  line  does  not  show  distinct  seasonal  changes. 

This  examination  shows  that  supply  and  demand  in 
this  complex  industry  do  not  have  a  simple  and  direct 
effect  upon  price.  There  are  many  factors  to  be  con- 
sidered. In  the  wholesale  milk  price  there  is  a  clearcut 
distinction  between  seasons.  Usually  there  are  two  price 
contracts  per  year :  one  for  summer  milk  and  the  other  for 
winter  milk.  Even  these  may  be  graduated  by  the  month 
to  represent  changes  in  cast  of  production.  A  highly  sea- 
sonal perishable  commodity  will  show  a  more  decided  fluc- 
tuation. That  the  prices  of  such  perishables  have  been 
leveled  out  by  means  of  the  cold  storage  warehouse  is 
shown  by  the  following  graphs  drawn  by  the  Bureau  of 
Statistics  of  the  Department  of  Agriculture. 

The  conclusion  from  the  above  study  is  also  of  great 
significance  in  relation  to  prices  in  the  primary  market. 
"The  principal  point  of  interest  in  this  comparison  is 
to  discover  how  closely,  or  otherwise,  prices  at  the  farm 
vary  from  the  other  prices.  The  general  fact  appears 
that  farm  prices  vary  with  city  prices,  sometimes  closely, 
and  often  roughly  so.  Sometimes  it  is  the  farm  price 
that  follows  the  city  price,  and  sometimes  it  is  the  city 
price  that  follows  the  farm  price,  if  one  may  depend  on 
these  tables  for  the  inference."7 

'Ibid,  p.  70. 


234 


MARKETING 


The  prices  in  wholesale  markets  tend  more  strongly  to 
be  leveled  out  to  an  adjustment  between  markets  represent- 
ing costs  of  transporting,  than  local  prices.    In  a  highly 


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organized  business,  as  that  of  wheat,  markets  are  kept 
closely  adjusted  through  arbitrage.  In  perishable  products 
the  diversion  of  cars  in  transit  aids  greatly  in  price  adjust- 
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MARKET  PRICE  235 

prices  constitute  a  system  in  the  literal  sense  that  they  are  so 
connected  as  to  make  a  complex  whole.  To  understand  the  work- 
ings of  this  system  at  any  given  time  and  the  changes  it  under- 
goes from  one  time  to  another,  it  is  necessary  to  trace  the  inter- 
connections among  different  parts  of  the  system.  These  inter- 
connections are  numerous  and  varied  in  their  character.  The 
whole  system  of  prices  is  not  a  miscellaneous  aggregate  of  simple 
commodities,  but  an  organized  combination  of  groups  of  com- 
modities. The  prices  of  articles  within  this  group  have  especially 
intimate  relations  with  each  other  and  the  groups  themselves 
cross  each  other  in  rather  perplexing  ways.8 

160.  Retail  Prices. — Since  raw  materials  run  largely  on 
the  basis  of  wholesale  lots,  the  problem  of  retail  prices 
is  not  so  fundamental.  Foodstuffs,  however,  pass  on  to 
the  consumer  for  the  most  part  without  manufacture. 
It  is  here  that  the  problem  of  retail  prices  arises.  Some- 
thing needs  to  be  said,  therefore,  about  the  retail  price 
system. 

Goods  flow  into  the  wholesale  market  in  large  lots,  are 
there  graded,  broken  up  and  sold  to  the  retailer  in  smaller 
lots.  The  retailer  in  turn  sells  in  smaller  lots  still  to  the 
consumer.  In  general  the  margin  between  the  producer's 
price  and  the  wholesale  price  is  wider  than  that  between 
the  wholesale  price  and  the  retail  price.  This  means  that 
on  the  whole  the  public  is  a  better  buyer  than  the  producer 
is  seller. 

Another  characteristic  of  the  retail  price  is  that  it  is 
not  so  sensitive  to  change  as  the  wholesale  price.  The 
reason  for  this  is  largely  psychological.  It  is  to  be  remem- 
bered that  the  retailer  meets  the  consumer  face  to  face, 
and  every  change  in  price,  especially  an  increase,  may 
need  explanation.  A  maker  of  macaroni  debated  for  some 
time  the  best  means  of  getting  the  retail  price  of  his 
goods  increased.    They  were  sold  in  a  package  at  a  uniform 

8  Mitchell,  History  of  Prices  During  the  War,  Summary,  p.  92. 


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MARKET  PRICE  237 

price ;  they  were  known  in  the  trade  by  a  package  of  stand- 
ard size  at  a  fixed  price.  The  possibilities  were  to  reduce 
the  amount  in  the  package,  to  increase  the  size  and  price  of 
the  package,  or  to  raise  the  price  on  the  original  package. 
It  was  clearly  a  question  of  consumer  psychology.  But 
the  manufacturer  endured  for  a  long  period  the  increasing 
pressure  of  costs  before  any  change  at  all  was  made. 

The  retailer  is  anxious  to  keep  his  goods  moving;  small 
capital  with  rapid  turnover  is  good  business.  His  price 
must,  if  possible,  be  such  as  to  move  the  goods.  Deteriora- 
tion, especially  in  perishable  goods,  is  rapid,  and  the  risks 
are  correspondingly  large.  The  margin  between  cost  and 
price  is  therefore  made  as  wide  as  can  be  done  and  get 
the  goods  sold.  The  retailer's  margin  on  groceries  runs 
from  25  per  cent  to  40  per  cent.  The  most  common  figure, 
that  is  the  mode,  for  the  total  expense  of  a  grocery  store  is 
16.5  per  cent,  with  an  annual  profit  concentrating  about 
4.5  per  cent. 10 

Like  wholesale  prices,  the  retail  prices  form  a  complex 
system.  They  are  related  to  all  of  the  prices  that  have 
preceded,  and  they  have  interrelations  of  their  own.  What- 
ever affects  purchasing  power  affects  retail  prices.  The 
prices  of  substitutes  and  of  by-products  of  great  industries 
are  factors  in  the  retail  price.  Nevertheless,  the  retail 
prices  are  dependent  upon  the  wholesale  prices,  just  as  is 
true  of  the  farm  prices  of  many  commodities.  In  the  entire 
price  system,  the  wholesale  price  is  most  highly  organized, 
most  sensitive  to  changes,  has  more  frequent  but  on  the 
whole  less  violent  fluctuations,  and  is  usually  the  control- 
ling price  for  both  producer's  prices  and  retailer's  prices. 

The  table  on  page  236  will  illustrate  the  entire  price 
system,  from  producer  to  consumer,  for  certain  perishable 
commodities  in  a  single  city  market. 

"Bureau  of  Business  Research,  Harvard  University,  Bulletin  No. 
5,  p.  8. 


233  MARKETING 

The  great  disturbance  in  prices  of  every  kind  caused  by 
the  World  War  has  appeared  with  exaggerated  effect  in 
the  retail-price  system.  Production  was  disrupted  and 
output  was  greatly  lessened.  The  public  read  on  all  sides 
about  shortages  in  supplies;  it  was  educated  into  expect- 
ing abnormally  high  prices.  There  was  no  longer  need 
for  the  retailer  to  defend  the  increase.  In  fact,  the  whole 
price  system  broke  loose  from  its  moorings.  Consumers 
had  no  means  of  defence  against  high  charges.  Wholesale 
prices  rose  to  such  a  height  as  to  carry  along  with  them 
the  entire  system  to  a  new  level. 

There  has  been  no  other  revolution  in  prices  so  sudden,  so 
violent,  and  so  widespread  as  the  revolution  that  accompanied 
the  war  of  1914-1918.  .  .  .  The  price  problems  with  which 
all  commercial  nations  are  now  concerned  spring  directly  from 
this  shifting  of  price  levels  during  the  war;  but  these  problems 
look  to  the  future,  not  to  the  past.  Is  the  period  of  violent 
fluctuations  closed,  or  is  a  counter-revolution  coming1?  If  prices 
fall,  when  will  the  fall  begin,  what  commodities  will  go  down 
first,  and  how  far  will  they  drop — back  to  the  pre-war  level? 
Or  should  every  one  adjust  his  plans  to  the  expectation  that 
prices  will  remain  indefinitely  at  their  present  height?11 

Certainly,  the  high  retail  prices  of  many  commodities 
will,  through  the  wholesale  price,  influence  production. 
"Once  a  rise  of  prices  is  started  in  any  important  branch, 
of  business  it  tends  to  spread  to  other  branches  and  to 
call  out  increased  production.  This  development  is  char- 
acteristic of  every  period  of  increasing  business  prosperity 
after  it  gets  under  way.  It  appeared  in  very  pronounced 
fashion  during  the  war."12 

This  experience  further  illustrates  that  the  retail 
price  tends  to  stabilize  at  a  "level,"  unless  it  is  thoroughly 

"Mitchell,  op.  cit.,  Summary,  p.  3. 
"Ibid.,  p.  39. 


MARKET  PRICE  239 

disturbed  by  some  far-reaching  influence.  The  record  for 
the  past  seventy -five  or  eighty  years  reveals  an  upward 
movement  stage  by  stage,  with  a  setback  from  time  to  time 
during  a  period  of  depression. 

Changes  in  methods  of  distribution,  reductions  in  cost 
of  producing  and  of  handling  goods,  new  means  to  secure 
economy,  the  elimination  of  wastes,  whatever  affects  in- 
dividual commodities,  will  inevitably  find  their  way  into 
the  retail  system.  All  of  the  psychology  of  salesmanship 
finds  place  here,  too,  such  as  odd  prices,  price  cuts,  special 
sales  prices,  the  advertising  of  prices,  the  emphasis  upon 
quality.  The  art  of  salesmanship  is  an  important  factor 
in  the  retail  price.  There  are  also  monopoly  prices  and 
competitive  prices.  Probably  the  most  important  factor 
in  the  recent  development  of  retailing  is  the  trade  asso- 
ciation,— local  retail  associations,  such  as  the  retail  grocers 
association,  retail  hardware  association,  association  of  retail 
shoe  dealers,  and  so  on.  Through  these  associations  retail 
prices  tend  to  be  leveled  out  from  section  to  section.  For- 
merly there  might  be  a  considerable  difference  in  price  even 
within  the  local  retail  market.  Now  this  is  more  and  more 
rare.  These  associations  have  become  a  great  leveling  and 
stabilizing  factor. 

161.  Price  Quotations. — Wholesale  as  well  as  retail 
prices  are  often  quoted  in  the  papers.  It  is  important  to 
know  what  these  quotations  mean  and  how  they  are  arrived 
at.  In  the  exchanges  the  quoting  of  prices  is  carefully 
regulated.  At  the  opening  of  the  exchange  each  morning 
there  is  a  bit  of  flurry  in  buying  and  selling,  a  playing  for 
advantage  between  the  bulls  and  bears,  for  the  first  sale 
makes  the  "opening"  price  for  the  day,  and  fluctuations  up 
or  down  are  calculated  from  it.  There  is  a  corresponding 
struggling  just  before  the  closing  gong  strikes.  Between 
these  two  prices  all  variations  are  recorded,  together  with 
the  amount  bought  or  sold  at  the  new  price.    All  of  these 


240  MARKETING 

prices  are  reported  and  spread  broadcast  throughout  the 
country.  They  represent,  however,  prices  for  the  basic 
grades  of  commodities.  In  addition,  there  may  also  be  given 
in  Hie  market  reports  what  is  bid  or  at  what  figure  the  com- 
modity is  offered. 

In  the  stockyards  the  day's  prices  are  quoted  for  differ- 
ent grades  of  livestock,  and  the  ranges  in  price  are  usually 
given.  It  may  happen  that  no  single  transaction  has  taken 
place  at  the  figures  quoted,  but  within  them  the  sales  have 
taken  place.  These  price  ranges  are  secured  by  a  special 
reporter  who  circulates  from  day  to  day  among  the  com- 
mission men  and  stock  buyers  and  makes  inquiry.  On  the 
Butter  and  Egg  Board  the  prices,  bid  and  offered,  are 
written  on  the  blackboard,  but  the  reported  quotations  are 
secured  in  much  the  same  way  as  in  the  stockyards.  In 
the  produce  market  the  representative  of  the  official  bulle- 
tin interviews,  for  instance,  the  "dressers"  and  live-poul- 
try men  regarding  prices  for  the  day;  and  having  formed 
his  own  judgment  of  the  feeling  at  the  time  the  session  is  on, 
he  establishes  the  quotation  for  the  day.  It  may  be  said, 
in  general,  that  market  quotations  belong  to  the  newspaper 
business  rather  than  to  the  market.  The  reporters  go  about 
the  street  and  find  out  the  views  of  different  merchants, 
and  out  of  these  "talks"  develop  the  price  quotations  for 
the  day. 

These  methods  of  quoting  prices  are  very  different  from 
quotations  sent  out  in  answer  to  inquiries.  The  latter  con- 
stitute a  legal  offer;  the  former  do  not.  General  price 
quotations,  such  as  appear  in  the  newspaper,  are  far  less 
definite  than  the  quotations  sent  out,  for  instance,  to  coun- 
try elevators  by  grain  brokers,  or  to  local  markets  by  butter 
and  egg  commission  men.  The  livestock  man  who  reads  a 
market  quotation  in  his  paper  cannot  be  assured  that  he 
can  obtain  it  actually.  In  fact,  market  quotations  are  open 
to  all  the  abuses  of  market  news,  of  which  they  are  a  part. 


MARKET  PRICE  241 

It  is  an  open  question  whether  or  not  they  should  be  left 
to  the  control  of  private  business. 

162.  Price  "Steps"  or  Intervals. — When  changes  in 
prices  occur,  they  take  place  on  the  basis  of  intervals  or 
steps  determined  largely  by  the  degree  of  organization  in 
the  market  and  by  business  practice.  In  a  highly  organized 
market,  like  that  of  grain  or  cotton,  changes  in  price  occur 
as  narrow  as  a  fraction  of  a  cent,  say  one-eighth.  Foreign 
exchange  quotations  run  as  narrowly  as  one-sixty-fourth  of 
a  cent.  More  fractional  changes  are  made  in  the  wholesale 
price  than  in  the  retail  price.  In  fact,  change  margins  on 
the  whole  are  much  wider  in  the  retail  market  than  else- 
where, and  in  "fancy"  goods,  or  where  price  is  a  minor 
consideration,  than  in  staples.  Prices  in  a  fraction  of  a  cent 
do  not  occur  in  retailing  except  for  more  than  one  unit,  be- 
cause change  cannot  be  made.  Quotations  are  made,  there- 
fore, such  as  the  common  one  of  13  cents  each  or  two  for 
25  cents. 

"Wide  margins  appear  not  only  when  changes  are  made 
in  the  price,  but  also  between  grades.  "Fancy"  grades 
carry  a  price  removed  by  a  wide  margin  from  common 
grades.  Grapefruit  may  have  a  common  grade  at  10  cents 
apiece,  with  the  next  grade  15  cents  each.  This  difference 
of  five  cents  is  not  arrived  at  by  careful  study ;  it  is  merely 
the  next ' '  step. ' '  In  this  matter  of  price  graduation,  as  in 
quoting  prices,  there  is  opportunity  for  abuse,  especially 
because  the  consumer  is  becoming  less  and  less  expert  as  a 
bargainer. 

163.  Sympathetic  Prices. — The  sensitive  point  in  mar- 
keting for  the  great  mass  of  people  is  the  daily  price  of 
the  things  they  buy.  So  subtle  and  intangible  aro  the  forces 
at  work  upon  the  marketplace,  so  complex  and  indeter- 
minable the  influences  registered  upon  the  sensitive  dial  of 
market  price,  that  the  general  consumer  despairs  of  under- 
standing and  acquiesces  so  long  as  he  can  endure  the  stress. 


242  MARKETING 

But  probably  the  most  baffling  phase  oi  the  whole  price 
problem  is  that  of  sympathetic  fluctuations.  What  wire- 
less is  to  telegraphy,  these  sympathetic  forces  are  to  the 
general  market  price  changes. 

It  appears  reasonable  that  prices  should  rise  and  fall 
directly  as  the  result  of  changes  in  the  relationship  of  sup- 
ply and  demand,  both  of  the  commodities  themselves  and  of 
real  or  possible  substitutes.  Bread  prices  rise  because  the 
price  of  wheat  has  risen,  due  to  a  shortage  in  supply.  The 
price  of  potatoes  increases  because  of  a  poor  crop,  and  rice 
increases  in  price  because  of  a  demand  created  by  a  potato 
shortage.  Shoes  are  dearer  because  leather  is  scarce ;  cloth- 
ing is  higher  because  cotton,  wool,  and  dyes  are  up.  But 
just  because  these  things  have  increased  in  price  is  no 
reason  why  brooms  should  suddenly  leap  up  35  or  40  cents, 
or  why  coffee,  tea,  and  cocoa  should  rise,  or  why  the  price 
of  bananas  should  go  up. 

Sympathetic  price  changes  are  psychological.  The  higher 
price  of  commodities,  driven  up  by  a  shortage  of  supply, 
breaks  through  the  established  system,  and  paves  the  way 
for  all  commodities.  Shortages  are  talked  about  every- 
where, until  things  are  "expected"  to  be  higher  in  price. 
Middlemen  are  not  slow  to  take  advantage  of  such  a  con- 
dition in  the  public  mind.  To  them  it  is  a  part  of  demand 
and  supply. 

164.  The  "Spread." — Considerable  interest  has  been 
manifested,  in  late  years,  in  the  margin  between  the  price 
paid  the  producer  and  the  price  charged  the  consumer. 
This  margin  is  called  the  "spread."  It  has  been  estimated 
that  the  producer  of  farm  products  gets  from  33V-}  per 
cent  to  47  per  cent  of  the  consumer  price.  An  expert  tes- 
tified recently  that  in  former  years,  "a  four-cent  hog  gave 
a  nine-cent  pork-chop;  now  an  eight-cent  hog  gives  an 
eighteen-cent  pork  chop."  The  accompanying  table  from 
official  sources  illustrates  the  "spread"  between  the  price  of 


MARKET  PRICE 


243 


wheat  to  farmers  and  the  price  paid  by  consumers  for 
flour.13 

Comparison  of  Price  Paid  Farmers  for  Wheat  and  Price  Paid  by 
Consumers  for  Flour,  March  and  October,  1906,  1910,  and  1911 


1906 

1910 

1911 

March 

October 

March 

October 

March 

October 

Average    price    per   bushel    paid 
farmers  for  wheat  of  all  grades 

$0,640 

$0,561 

$0,950 

$0,842 

$0,792 

$0,978 

Average  retail  price  of  49  lb.  of 

flour  as  sold  in  48  and  49  lb. 

sacks  by  34  retail  merchants: 

Including  value  of  sack 

1.226 

1.127 

1.575 

1.518 

1.437 

1.507 

Not  including  value  of  sack. . 

1.176 

1.081 

1.520 

1.465 

1.387 

1.460 

Average  retail  price  of  34.84  lb. 
of  flour  assumed  as  the  product 
of  1  bu.  of  wheat   (computed 
from   sales   in   48   and   49   lb. 
sacks,  as  reported  by  34  retail 
merchants)   value  of  sack  not 

.836 

.769 

1.081 

1.042 

.986 

1.038 

Excess  of  retail  price  of  34.84  lb. 
of  flour  assumed  as  made  from 
1   bu.   of  wheat  over  elevator 

.196 

.208 

.131 

.200 

.194 

.060 

The  Federal  Trade  Commission  found  by  investigation 
that  Boston  coal  dealers,  who  paid  $6.65  in  April  and  $6.75 
in  May,  1917,  for  anthracite  coal,  sold  it  "almost  uniformly" 
at  $9.50  per  net  ton.14 

The  war  has  largely  unsettled  these  margins.  In  such  a 
situation,  the  unscrupulous  dealers  will  take  advantage  of 
the  defenseless  public  to  profiteer.  ' '  Society  has  permitted 
large  margins  for  a  marketing  cost  and  now  society  is  in- 
vestigating to  see  how  this  margin  is  used."  15 

165.  Price  Fixing.— To  prevent  a  disruption  of  the  mar- 
ket, the  government  decided  during  the  war  to  control  the 

13  U.  S.  Bureau  of  Labor  Statistics,  Bulletin  No.  13a,  p.  4. 

14  Official  Bulletin,  August  27,  1917,  p.  9. 

18 S.  O.  Martin,  Annals  of  the  American  Academy  of  Political  and 
Social  Science,  May,  1915. 


244 


MARKETING 


VOWTTEO  INCONlMeEBStt-FOICES* 

ALL  COMMODITIES 

DB6&CR1U 

DURING  TttCVWJ 


CHAKT   SHOWING  THE  EFFECT  OF  PEICE   FIXING   DURING   THE  "WAR 

prices,  at  least  of  the  essential  commodities.  A  minimum 
price  was  guaranteed  for  wheat ;  a  margin  of  profit  was  set 
for  the  meat  packers ;  wholesale  prices  were  published  and 
retail  prices  were  "suggested";  the  price  of  pork  was  tied 
up  with  the  price  of  corn;  the  price  of  milk  was  fixed  at 
"the  cost  of  production  plus  a  reasonable  profit."  But 
not  all  commodities  were  controlled  and  a  comparison  is 
thus  posible  to  show  the  relative  movements.  The  accom- 
panying graphs  afford  this  comparison,  as  well  as  the 
relation  of  foodstuffs  to  ' '  all  commodities. ' ' 16 

166.  Fair  Price. — Much  has  been  said  recently  about  a 
fair  price.    The  question  always  comes  forward  prominently 


19  Mitchell,  op.  cit.,  Summary,  p.  47. 


MARKET  PRICE 


245 


MtMMd  wrx  Hurtfo  or  men  <r 

FOOD  CROUP  „ 

—ALL  COMMODITIES 


•MMUAOV.  ?0iS'*OCCE>lB£O.iaft 
AVCDACC  COOTCO  PPICCAJLLr,t9ti"OL.4C^3M  100 


I     ig»     |    ipm     r    'on    1     IQ'Q     I     1017     I    iota    I 


CHART    SHOWING    THE   EFFECT    OF   PRICE   FIXING    DURING    THE   WAR 


as  prices  rise.  No  satisfactory  answer  has  been  given,  how- 
ever, and  the  subject  is  as  confused  as  ever.  Probably  the 
most  widely  accepted  principle  by  which  prices  were  set, 
during  the  period  of  their  control,  was  cost  plus  10  per  cent 
profit.  From  a  broad  social  point  of  view,  a  fair  price  is 
one  which  will  call  forth  sufficient  production  and  at  the 
same  time  permit  adequate  consumption.  Practically,  there 
must  be  such  an  adjustment  of  prices  that  the  masses  of 
people  can  buy  a  sufficient  amount  of  the  necessaries  of 
life.  If  they  must  economize  to  the  point  of  keen  depriva- 
tion, there  will  arise  resentment  at  an  unjust  price  system, 
whatever  the  causes.    Fair  price  is  the  result  of  an  atti- 


24G  MARKETING 

tude  of  mind;  one  which  results  from  a  feeling  of  general 
well-being. 

167.  Prices  and  Costs.— Practically,  as  well  as  theoret- 
ically, the  minimum  of  prices  for  a  long  period  is  cost. 
This  principle  holds  true  for  handling  goods  just  the  same 
as  for  producing  them.  The  charge  for  transportation,  for 
example,  has  as  a  minimum  the  actual  cost,  and  for  a  maxi- 
mum a  vaguely  determinable  rate  called  "what  the  traffic 
will  bear."  The  analogue  of  this  minimum  and  this  maxi- 
mum runs  through  all  prices. 

Men  do  what  pays  them  best.  All  middlemen  want  to 
handle  those  goods  that  carry  the  largest  margins  between 
cost,  including  expenses  of  handling,  and  the  selling  price. 
They  may  refuse  to  distribute  commodities  which  will  not 
pay  a  return  above  cost  that  is  sufficiently  attractive.  Fruit 
has  been  left  to  rot  in  Michigan  orchards  because  the  Chi- 
cago market  would  not  absorb  it  at  a  satisfactory  margin. 
Just  as  the  producers  demand  a  satisfactory  return  for  an 
adequate  supply,  so  the  middlemen  demand  a  satisfactory 
return  for  distributing  commodities. 

Suggestions  fob  Study 

At  this  point  the  student  should  study  the  price  prob- 
lems connected  with  his  special  commodity.  For  classroom 
work  the  following  points  will  serve  for  discussion.  The 
readings  given  below  should  be  assigned  as  a  background 
for  discussion. 

1.  Market  price  as  a  focus  of  economic  forces. 

2.  Price  index  numbers. 

3.  Forecasting  prices. 

4.  Scientific  method  of  price  quotation. 

5.  "All  economic  purposes  and  methods  take  on  the  price 

emphasis.     Price  becomes  the  central  and  pivotal  fact 
in  all  industry  and  business.     The  theory  of  price  is 


MARKET  PRICE  247 

thus   the   core   of  all   economic   theory.     The  rest   is 
corollary  or  application." 

6.  Trace  the  relation  between    (a)    production,    (b)    whole- 

sale price,  and  (c)  farm  price  of  some  commodity. 

7.  Dominating  factors  in  price. 

8.  A  basic  price. 

9      Price  quotations  and  actual  sales. 
10.     The  price  system. 

Readings  : 

U.    S.    Department    of    Labor,    Bureau    of    Labor    Statistics, 

Whole  No.  114,  p.  22; 

Whole  No.  181,  pp.  34-8,  110-17; 

Whole  No.  130; 

Whole  No.  134. 

Huebner,  Agricultural  Commerce,  Chap.  XVII. 

Weld,  Marketing  of  Farm  Products,  Chaps.  XII,  XIV. 

Copeland,  Business  Statistics,  pp.  53-97. 

Wiest,  Butter  Industry  in  U.  S.,  Chap.  VII. 

Adams,  Marketing  of  Perishable  Farm  Products,  Chap.  II. 

Annals   of   the   American    Academy   of   Political    and   Social 

Science,  September,  1911,  pp.  155-188. 
Todd,  The  World's  Cotton  Crop,  Chap.  VIII. 
Mitchell,    History    of   Prices   During    the    War,    "Summary" 

(this  entire  series  should  be  available). 
Holmes,  "Cold  Storage  and  Prices,"  U.  S.  Department  of  Agri- 
culture, Bureau  of  Statistics,  Bulletin  No.  101. 


CHAPTER  XII 

FINANCING    DISTRIBUTION 

168.  The  Relation  of  Finance  to  Marketing. — In  mar- 
keting as  well  as  in  production,  tlie  problem  of  financing  is 
a  pervasive  one.  At  every  step  of  the  way  from  source  to 
consumption,  the  commodity  is  a  financial  burden  on 
some  one.  Financial  responsibility  is  the  essence  of  risk 
in  marketing.  In  order  to  perform  this  financing  function 
there  has  been  developed  not  only  the  cash  banking  system 
but  also  a  remarkable  credit  system,  by  means  of  which 
charges  are  piled  up  against  the  goods  themselves.  It  is 
true  in  a  very  real  sense  that  commodities  are  in  many 
cases  compelled  to  furnish  their  own  finances. 

It  does  not  lie  within  the  scope  of  this  discussion  to  ex- 
plain the  organization  of  banking  or  the  methods  of  bank- 
ing. The  relation  of  finance  to  the  marketing  problem 
is,  however,  necessary  and  essential  to  an  understanding  of 
a  very  important  phase  of  the  subject.  In  the  first  place, 
commodities  may  be  used  as  collateral,  that  is,  as  security, 
for  borrowing  money,  and  there  must  be,  for  good  business 
practice,  a  document  to  identify  the  responsible  party.  The 
plan  to  be  followed  in  this  discussion  is  to  define  the  various 
methods  of  sale,  and  then  to  take  up  in  detail  the  chief 
credit  instruments,  such  as  the  check,  the  bill  of  exchange, 
the  bill  of  lading,  the  warehouse  receipt,  and  the  trade  ac- 
ceptance. 

169.  Methods  of  Sale. — Commodities  are  usually  sold  in 
the  local  market  on  a  cash  basis.  There  is  the  well-known 
seasonal  strain  upon  the  financial  system  to  concentrate 

248 


FINANCING  DISTRIBUTION  249 

sufficient  funds  in  the  grain-growing  regions.  It  may  be 
that  some  local  merchant,  hanker,  or  dealer  will  give  credit 
on  a  growing  crop  of  cotton,  grain,  or  other  produce,  or  on 
a  herd  of  cattle.  In  the  latter  case,  ' '  loans  made  by  cattle- 
loan  companies  are  divided  generally  into  three  classes. 
These  comprise:  (1)  feeder  loans,  (2)  stocker  loans,  sub- 
divided into  loans  on  cows,  loans  on  young  stock,  and  '  sum- 
mer loans, '  and  ( 3 )  dairy  loans. ' ' x  This  operation  is,  how- 
ever, analogous  to  loans  to  manufacturers  and  is  not  essen- 
tially a  marketing  problem.  Cooperative  companies  may  set- 
tle periodically.  It  may  be  said,  in  general,  nevertheless, 
that  the  local-market  sale  is  a  cash  sale. 

When  commodities  are  sent  to  the  primary  market  there 
are  several  types  of  sale.  (1)  They  may  be  consigned  to 
a  commission  man,  broker,  or,  as  in  the  case  of  cotton,  to  a 
factor.  In  this  case,  the  middleman  who  receives  them 
waits  until  they  are  sold  by  him  before  settling,  and  then 
after  deducting  his  fee,  transportation  charges,  and  other 
cost,  remits  the  balance  to  the  shipper.  (2)  Shippers  may 
run  an  open  account  system,  collecting  periodically.  (3) 
Goods  may  be  shipped  with  a  draft  attached  to  the  bill  of 
lading,  and  payment  must  be  made  to  a  bank  who  handles 
the  transaction.  (4)  Prices  may  be  made  f.o.b.  destination 
or  shipping  point.  (5)  The  condition  of  sale  may  include 
all  payment  for  transportation  and  delivery,  and  is  known 
as  "delivered"  sale.  (6)  Sales  may  be  made  on  the  basis 
of  a  previous  contract.  (7)  Sales  may  also  be  made  through 
an  auction,  generally  known  as  "auction,"  to  distinguish  it 
from  "private,"  sale. 

Credit  plays  a  very  large  part  in  the  wholesale  market 
sales.  It  has  been  estimated  that  more  than  90  per  cent  of 
the  wholesale  transactions  involve  some  kind  of  credit  in- 
struments. Here,  then,  the  next  problem  of  financing 
arises.    In  the  use  of  the  credit  instruments,  who  has  the 

1 Journal  of  Political  Economy,  vol.  xxvi,  p.  810. 


250  MARKETING 

advantage  ?  Does  this  method  place  the  control  of  the  goods 
more  or  less  quickly  into  the  hands  of  the  middlemen  ?  Do 
these  instruments  serve  the  best  interests  of  producer, 
middleman,  retailer,  consumer? 

Between  wholesaler  and  retailer  there  is  also  an  extended 
use  of  credit  instruments.  One  important  function  per- 
formed by  the  wholesaler  is  to  aid  the  retailer  financially. 
A  great  many  methods  are  used  here.  It  is  the  field  for  the 
operation  of  the  trade  acceptance.  The  bill  of  exchange  is 
also  frequently  used.  In  general,  the  aim  is  to  make  the 
goods  responsible  for  the  financial  obligation,  payment  be- 
ing made  as  the  goods  are  sold.  This  is  the  field  for  the 
credit  man. 

There  are,  then,  two  methods  of  sale,  for  cash  and  on 
credit.  Banks  must  stand  behind  both  of  these  methods. 
In  the  former,  the  deal  is  speedily  closed;  possession  and 
title  pass  from  producer  to  middleman  at  once ;  full  re- 
sponsibility is  transferred.  In  the  latter  case,  the  deal  is 
prolonged,  is  more  complicated,  and  creates  numerous  prob- 
lems. These  can  best  be  studied  through  the  credit  instru- 
ments themselves. 

170.  The  Check. — The  most  familiar  credit  instrument 
is  the  check.  It  is  a  demand  note,  payable  at  sight,  and  is 
most  serviceable  to  save  the  actual  handling  of  cash.  When 
the  necessary  relationship  between  buyer  and  seller  is  es- 
tablished, it  is  a  convenient  means  of  facilitating  a  trans- 
action. There  is  no  need  to  discuss  it  in  its  various  forms ; 
the  chief  inquiry  to  make  is  about  its  negotiability.  When 
this  is  established  the  check  can  readily  take  the  place  of 
cash.  Gradually  it  is  displacing  the  use  of  cash  in  the  local 
markets  as  the  producers  are  being  educated  to  appreciate 
its  convenience.  It  serves  so  well  as  a  receipt,  in  addition 
to  being  a  medium  of  exchange,  that  prejudice  only  will 
limit  its  use.  "We  are  justified  in  concluding  that  50  or 
60  per  cent  of  the  retail  trade  of  the  country  is  settled  in 


FINANCING  DISTRIBUTION  251 

this  way.  Over  90  per  cent  of  the  wholesale  trade  of  the 
country  is  done  with  checks  and  other  credit  documents. 
We  may  therefore  safely  accept  an  average  of  80  to  85  per 
cent  as  the  probable  percentage  of  business  of  this  country 
transacted  by  check. ' ' 2 

171.  Bill  of  Exchange. — In  general,  a  bill  of  exchange 
is  an  unconditional  order  signed  by  one  party,  the  drawer, 
upon  another,  the  drawee,  to  pay  on  demand  or  at  a  speci- 
fied or  definite  future  date,  a  sum  of  money  to  bearer  or 
to  a  third  party,  the  payee.  It  is  the  custom  for  the  drawee 
to  indicate  his  willingness  to  pay,  that  is,  he  " honors"  the 
draft,  by  writing  across  the  face  of  it  the  word  "accepted." 
According  to  whether  or  not  the  bill  of  exchange  has  to  do 
with  parties  living  in  the  same  country  or  in  different  coun- 
tries, it  is  called  a  domestic  bill  or  a  foreign  bill.  Practi- 
cally no  distinction  is  made  between  a  draft  and  a  bill  of 
exchange ;  the  words  refer  to  the  same  type  of  instrument. 

Bills  of  exchange  may  be  drawn  by  one  banker  upon  an- 
other; these  are  called  banker's  bills,  or  finance  bills.  They 
also  may  arise  out  of  a  commercial  transaction ;  these  are 
called  commercial  bills.  It  is  the  latter  class  that  is  of 
particular  interest  here.  Commercial  bills  represent  credit 
granted  against  the  goods,  as  well  as  upon  the  responsibil- 
ity of  the  party  who  accepts.  Accommodation  bills  and 
promissory  notes  are  not  considered. 

The  person  upon  whom  the  commercial  bill  of  exchange, 
or  draft,  is  drawn  is,  generally  speaking,  the  purchaser  of 
goods,  or  his  agent  or  representative.  It  is  immediately 
clear  that  the  draft  is  used  to  facilitate  long  distance  trans- 
actions. The  seller  of  goods  needs  quick  payment,  in  order 
that  he  may  carry  on  business  continuously;  the  buyer 
may  need  to  borrow  money  on  the  goods  sent,  to  be  repaid 
as  they  are  sold.    Both  the  seller  and  the  buyer  look  to  the 

9  Quoted  in  Moulton,  Principles  of  Money  and  Banking,  p.  37. 


252  MARKETING 

banker.  For  the  required  loan,  the  banker  needs  security. 
The  mechanism  for  facilitating  the  loan  is  the  bill  of  ex- 
change, and  the  security  is  the  bill  of  lading  which  carries 
title  to  the  goods.  On  a  part  of  the  way  these  two  docu- 
ments go  hand  in  hand ;  the  draft  reaches  the  banker  with 
the  bill  of  lading  and  other  documents  attached. 

The  documents  that  are  attached  to  a  draft  are,  in  do- 
mestic trade,  the  bill  of  lading,  the  insurance  certificate, 
and,  frequently,  the  invoice.  Other  documents  such  as 
customhouse  receipt,  consular  invoice,  are  employed  in 
foreign  trade.  Usually  the  draft  moves  "documents 
against  acceptance,"  which  means  that  the  documents  at- 
tached to  the  draft  are  sloughed  off  when  the  drawee  has 
accepted  it,  and  are  given  to  the  consignee  thus  enabling 
him  to  obtain  the  goods.  The  bill  of  exchange  then  becomes 
a  "clean"  bill;  the  indebtedness  arising  from  the  transac- 
tion no  longer  runs  against  the  goods,  as  between  buyer  and 
seller.    It  now  becomes  a  banking  problem. 

Drafts,  especially  in  foreign  trade,  are  sent  in  duplicate. 
The  documents  are  made  out  at  least  in  triplicate  and 
sometimes  as  many  as  ten  copies  are  made.  An  example  of 
a  bill  of  exchange,  original  and  duplicate,  is  given  here- 
with. 

Drafts  are  sent  usually  to  banks  for  acceptance.  In 
handling  drafts,  endorsements  are  necessary  the  same  as 
with  checks.  Financial  arrangements  have,  of  course,  al- 
ways been  made  previously  with  the  drawee  for  the  accept- 
ance of  drafts.  This,  however,  is  also  a  banking  problem 
and  is  an  illustration  of  how  important  is  the  banking 
system  in  financing  the  marketing. 

It  is  important  that  drafts  should  be  readily  negotiable. 
In  order  that  a  draft  may  be  received  without  question 
it  must  not  only  be  properly  drawn,  but  also,  through  en- 
dorsement and  acceptance,  the  full  and  clear  liability  of  a 
responsible  party  must  be  established.    Personal  liability 


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254  MARKETING 

must  take  the  place  of  marketable   commodities.     These 
goods  are  then  free  to  enter  the  market  for  sale. 

Drafts  are  used  in  selling  goods  to  wholesale  merchants 
and  in  sales  by  wholesale  merchants  to  the  retail  trade. 
In  foreign  trade  the  use  of  drafts  is  the  generally  accept- 
able method  of  financing.  In  domestic  trade  there  has  been 
an  obstacle  to  its  general  use  by  the  rather  widespread  feel- 
ing that  a  draft  drawn  "against  document"  or  "against 
payment"  is  an  unwarrantable  method  of  "dunning"  the 
purchaser.  Abroad  this  form  of  credit  instrument  is  used 
more  widely. 

172.  Bill  of  Lading.3 — Among  the  multifarious  business 
forms  used  by  the  railroads  is  the  bill  of  lading.  This 
is  a  very  important  instrument  now  and  has  manifold  pos- 
sibilities for  future  development.  It  has  been  estimated 
that  annually  there  is  about  $25,000,000,000  worth  of  busi- 
ness handled  through  bills  of  lading  and  of  that  $5,000,000,- 
000  is  handled  by  the  banks.  It  is  no  wonder,  then,  that 
much  concern  is  felt  about  the  liabilities  and  conditions 
connected  with  the  bill  of  lading.  What  kind  of  an  in- 
strument this  bill  of  lading  is,  what  functions  it  performs 
as  a  commercial  document,  what  steps  have  been  taken  to 
safeguard  it  and  to  make  it  uniform,  and  under  what  con- 
ditions and  regulations  it  moves  to-day  will  be  discussed 
here. 

The  bill  of  lading  should  be  sharply  distinguished  from 
other  forms  associated  with  it.  The  freight  bill,  or  the 
shipping  bill,  is  a  receipt  for  the  goods  delivered  to  the 
carrier,  and  nothing  more.  It  is  a  form  developed  to  ful- 
fill that  specialized  function  out  of  which  the  bill  of  lading 
grew.    The  bill  of  exchange,  to  which  the  bill  of  lading  is 

8  The  substance  of  this  discussion  is  taken  by  special  permission 
from  an  article  by  the  writer  published  in  the  Journal  of  Political 
Economy,  vol  xxv,  pp.  679-703. 


FINANCING  DISTRIBUTION  255 

often  attached,  as  has  been  shown,  is  an  independent,  al- 
though interrelated,  document. 

As  a  mechanism  for  facilitating  the  transportation  of 
goods,  the  bill  of  lading  has  three  functions  to  perform. 
One  of  these  functions  is  to  serve  as  a  receipt  for  the  goods, 
in  which  it  duplicates  the  work  of  the  freight  bill.  Indeed, 
it  is  gradually  transplanting  that  document,  just  as  the 
check  is  displacing  the  formal  receipt  in  general  mercan- 
tile transactions.  A  second  function  is  to  serve  as  a  writ- 
ten evidence  of  a  contract  of  shipment  between  shipper 
and  carrier.  A  third  function  is  to  serve  as  a  document 
of  title  to  goods.  In  one  or  the  other  of  these  functions 
the  bill  of  lading  meets  the  needs  of  four  parties  chiefly 
concerned  with  a  shipment  of  goods,  i.e.,  the  shipper,  the 
carrier,  the  banker,  and  the  consignee. 

Bills  of  lading  also  fall  into  various  groups  or  classes, 
according  as  they  are  looked  at  from  different  angles. 
First,  as  to  kinds  of  freight,  the  bills  fall  into  two  groups. 
There  are  those  intended  to  apply  to  general  merchandise, 
which  may  be  grouped  into  one  great  class.  The  second 
kind  may  be  called  commodity  bills,  such  as  those  intended 
for  the  conveyance  of  livestock,  grain,  cotton,  and  perish- 
able produce.  These  are  generally  known  as  grain  bills, 
cotton  bills,  and  so  forth.  Again,  bills  of  lading  may  be 
classified,  on  the  basis  of  the  maker,  into  those  issued  by  a 
firm  or  corporation  or  individual — a  private  bill — and  those 
issued  by  the  carriers  themselves.  In  another  way,  they 
may  be  arranged  on  the  basis  of  the  factors  effecting  nego- 
tiability into  order  bills  and  straight  bills.  The  former  are 
those  which  may  be  transferred  by  indorsement,  the  latter 
are  those  accompanying  the  goods  consigned  directly  to 
consignee  and  are  merely  assignable.  And,  finally,  on  the 
basis  of  the  "conditions"  of  the  contract  of  carriage,  the 
stipulations  and  the  limitations  of  liability,  and  the  agree- 
ments with  connecting  lines,  there  are  the  standard   (or 


256  MARKETING 

Revised  Bill  of  the  Southern  Classification  Territory),  the 
uniform,  the  through,  and  export,  and  the  special  bills. 
The  last-named  are  distinct  as  being  issued  under  common- 
law  liability. 

For  several  years  there  was  a  movement  to  make  bills 
of  lading  uniform  throughout  the  country,  both  as  to  the 
law  under  which  carriers  operate  and  as  to  the  conditions 
of  the  contract  of  shipment.  This  question  of  uniformity 
resolves  itself  into  an  attempt  to  harmonize  the  interests 
of  the  four  parties  chiefly  concerned  in  the  transportation 
of  commodities.  The  shipper,  in  sending  forth  his  goods 
into  distant  markets,  is  desirous  of  ridding  himself  as 
quickly  as  possible  of  all  responsibility  for  them  and,  at 
the  same  time,  of  being  able  to  realize  as  quickly  as  possible 
on  the  deal.  He  is  anxious  to  have  his  goods  arrive  as  speed- 
ily and  safely  as  possible  and  to  have  his  customer  accom- 
modated as  completely  as  possible  with  the  least  possible 
expense.  That  is,  the  shipper  insists  upon  as  much  service 
from  the  carrier  as  he  can  get  for  the  transportation 
charge.  Opposed  to  these  interests  of  the  shipper  are  those 
of  the  carrier,  who  naturally  wants  to  assume  as  little  re- 
sponsibility as  he  can.  One  fundamental  issue  arises  out 
of  this  clash  of  interests — where  shall  the  carrier 's  duty  and 
liability  begin  and  where  shall  they  end? 

On  the  financial  side,  too,  an  issue  appears.  Here  the 
interests  of  the  shipper,  the  carrier,  and  the  banker  are 
involved.  It  has  been  said  that  the  shipper  wants  to  be 
able  to  secure  speedy  reimbursement.  For  this  he  appeals 
to  his  banker,  who  says  that  he  is  willing  to  finance  the 
transaction  for  a  fee,  provided  his  own  interests  are  safe- 
guarded. This  means  that  there  must  never  be  any  doubt 
of  the  documents  accompanying  the  bill  of  exchange,  and 
this  means  that  always  the  liability  on  the  bill  of  lading 
shall  be  sure  and  definite.    To  what  extent,  then,  can  any 


FINANCING  DISTRIBUTION  257 

doubt  as  to  the  validity  of  the  bill  of  lading  arise,  and 
what  is  the  status  of  liability? 

As  for  the  consignee,  his  interests  in  the  bill  of  lading, 
while  not  identical  with,  aid  and  abet  those  of  the  shipper. 
Just  as  the  latter  wants  the  goods  delivered  so  as  to  ac- 
commodate the  consignee  with  least  expense,  so  the  con- 
signee wishes  to  get  as  much  service,  in  addition  to  his 
goods,  as  he  can.  Both  shipper  and  consignee  try  to  shift 
the  burden  onto  the  carrier.  In  his  relations  with  the 
banker  the  consignee  again  joins  with  the  shipper  in  asking 
for  financial  facilities.  Often,  of  course,  the  consignee 
pays  the  freight  and  in  such  a  case  becomes  the  shipper^ 
There  is,  therefore,  no  new  issue  developed  out  of  these 
relations. 

The  two  most  important  interested  parties  from  the  mar- 
keting point  of  view  are  the  shipper,  who  is  usually  the 
seller,  and  the  consignee,  who  is  usually  the  buyer.  The 
typical  shipper  represents  the  merchant  function  in  modern 
business.  His  immediate  and  ever-present  concern  is  to  have 
his  goods  available  for  as  wide  a  market  as  possible  at  least 
expense.  The  common  carriers  have  made  possible  for  him 
a  world-wide  market,  so  that  he  sells  to  buyers  whom  he  has 
never  seen,  goods  which  they  have  never  seen.  No  matter 
whether  this  shipper  is  large  or  small,  whether  he  has  his 
own  sidetrack  or  hauls  his  goods  to  the  freight  station, 
whether  he  loads  his  own  cars  or  those  of  the  railroad,  he 
loses  control  and  care  of  his  goods  when  they  start  forth 
on  their  journey.  So  dependent  has  he  become  on  this  com- 
mon carrier  that  he  feels  his  responsibility  ended  when 
the  goods,  as  ordered,  are  delivered  to  the  railroad.  All 
he  asks  in  return  is  some  indubitable  evidence  to  serve  as 
a  receipt  as  to  the  character  and  amount  of  goods  shipped, 
and  by  means  of  which  he  can  pass  title.  The  shipper  then 
turns  his  attention  to  getting  his  money  out  of  the  deal  as 
soon  as  he  can. 


258  MARKETING 

The  typical  consignee  is  the  purchaser  of  goods  f.o.b.  des- 
tination. He  has  bought  goods  which  he  has  never  seen, 
from  a  distant  seller  whom  he  may  never  have  seen.  His 
first  interest  is  in  the  integrity  of  that  distant  seller,  for 
he  wants  to  be  confident  that  the  goods  are  of  the  character 
and  quantity  bargained  for.  He  leaves  it  to  the  seller  to 
arrange  for  the  arrival  of  the  goods.  But  from  the  carrier 
he  expects  assurance  that  the  goods  are  as  represented  in 
the  bill  of  lading ;  he  expects  a  check  on  the  integrity  of  the 
seller,  for  the  carrier  gives  a  receipt  at  the  shipping  point 
and  therefore  has  the  mechanism  for  checking  up  this  mat- 
ter. The  consignee  will  therefore  insist  that  the  carrier 
be  held  responsible  for  the  face  of  the  bill  of  lading  signed 
by  its  agent.  Aside  from  this  the  consignee  expects  from 
the  carrier  an  efficient  fulfillment  of  the  carrier  function, 
i.e.,  speedy  and  safe  transportation  and  the  prompt  notifi- 
cation of  the  arrival  of  the  goods.  On  his  part,  too,  he  must 
be  ready  to  receive  the  goods  and,  when  title  passes  to  him 
with  the  possession  of  the  bill  of  lading,  to  assume  his  re- 
sponsibility for  them.  The  point  at  which  this  responsi- 
bility passes  from  the  carrier  to  consignee  must  be  specifi- 
cally ascertainable. 

The  so-called  Pomerene  Bill,  which  became  a  law  on 
August  29,  1916,  and  went  into  effect  January  1,  1917, 
has  established  a  uniform  bill  of  lading  throughout  the 
country.  A  very  great  deal  was  said  at  the  hearings  on  this 
Bill  about  making  a  bill  of  lading  more  worthy  of  its  posi- 
tion as  an  important  document  by  means  of  an  increase 
of  its  negotiability.  Says  one  witness,  Sol.  Wexler,  Vice- 
President  of  the  Whitney  Central  National  Bank,  New  Or- 
leans, La. : 

I  maintain  that  the  business  of  the  world,  not  only  of  the 
United  States,  but  of  the  whole  world — as  it  is  done  to-day — is 
done    largely    upon    bills    of    lading,    whether    "to    order"    or 


FINANCING  DISTRIBUTION  259 

"straight";  that  it  has  become  the  most  important  instrument 
of  credit  in  use  in  the  world  to-day  of  any  kind;  and  that  it  is 
necessary  for  the  commerce  of  this  country  to  make  that  bill 
of  lading  fully  negotiable,  entirely  safe,  and  to  make  the  person 
who  receipts  for  the  goods,  whether  they  have  been  delivered 
to  him  or  not,  responsible  for  their  delivery.  .  .  .  All  we  are 
asking  of  this  bill  of  lading  is  to  protect  the  innocent  holder  of 
the  document.4 

And  also,  as  phrased  by  Francis  B.  James,  the  leading 
advocate :  ' '  An  order  bill  of  lading  is  commodity  currency, 
and  is  doubly  so  when  accompanied  by  a  draft — the  draft 
with  its  dollar  mark  representing  the  unit  of  value  and 
the  order  bills  of  lading  a  unit  of  quantity.  By  the  use 
of  a  negotiable  order  bill  of  lading,  properly  protected  by 
legal  sanction,  our  great  staples  and  other  commodities 
are  turned  into  a  part  of  the  asset  currency  of  the  coun- 
try. ' ' 5 

As  illustrated  by  these  quotations,  two  main  requests 
stand  out  from  the  discussion.  One  is  that  the  liability  on 
bills  of  lading  be  readily  ascertainable  from  those  instru- 
ments themselves,  and  the  other  is  that  the  bills  be  made 
more  fully  negotiable.  Incidentally  it  is  suggested  that 
the  liability  be  defined,  so  as  to  hold  the  carrier  more  fully 
than  formerly.  This  position  would  be  enough  in  itself 
to  range  the  shippers,  receivers,  and  bankers  on  the  one. 
side  of  the  question.  But  these  two  points  are  not  inde- 
pendent of  each  other.  Clearly  defined  liability  on  the 
part  of  the  responsible  party  is  an  essential  to  free  nego- 
tiability. Therein  may  lie  another  reason  for  holding  the 
carrier  to  more  extended  liability. 

Something  further  needs  to  be  said  about  the  negotia- 
bility of  the  bill  of  lading.  Extravagant  and  not  well-con- 
sidered statements  have  been  made  on  the  subject.    "The 

4  Hearings,  61st  Congress,  2d  Session,  p.  40. 
'Ibid.,  p.  55. 


2G0  MARKETING 

bill  of  lading,"  wrote  President  Hadley  years  ago,  "is 
made  to  serve  the  same  purpose  as  a  bill  of  exchange. ' ' 6 
"The  (order)  bill  of  lading  thus  contributes  to  that  fluidity 
of  the  circulating  medium,  that  celerity  in  the  transfer  of 
merchandise,  which  are  striking  achievements  and  essential 
requirements  of  current  civilization. " 7  "  Bills,  drafts, 
notes,  checks,  and  bills  of  lading  are  in  fact  and  practice 
parts  of  the  currency  of  commerce."  8  "A  negotiable  order 
bill  of  lading  ought  to  be  as  clean  as  a  check,  draft,  or 
promissory  note."  9  What  specifically  can  these  utterances 
mean?  Apparently  the  idea  that  lies  behind  them  is  that 
bills  of  lading  may  be  made  into  a  new  kind  of  currency 
of  commerce,  so  that  they  may  save  "the  necessity  of  the 
large  concentration  of  money  to  handle  and  move  the  staple 
commodities  of  the  country. ' ' 10 

Such  a  service  is  demonstrably  impossible.  Not  only 
are  bills  of  lading  representative  of  a  unit  of  quantity,  of 
a  certain  amount  of  certain  commodities — and  commodities 
for  obvious  reasons  can  never  again  become  a  universally 
acceptable  medium  of  exchange — but  they  also  are  not  used 
or  intended  to  be  used,  as  a  medium  of  exchange,  as  the 
currency  of  commerce  in  any  true  sense.  Negotiability,  as 
used  in  relation  to  bills  of  lading,  does  not,  or  should  not, 
imply  making  them  serve  the  purpose  of  bills  of  exchange. 
The  distinction  was  correctly  stated,  though  for  a  different 
purpose,  by  W.  W.  Porter  many  years  ago : 

A  large  number  of  dicta  have  been  uttered  by  eminent  author- 
ities in  assertion  of  the  negotiability  of  the  bill  of  lading,  but 
no  case  can  be  found,  unless  arising  under  a  special  statute,  in 

8  Railroad  Transportation,  p.  58. 

"McPherson,  Railroad  Freight  Bates  in  "Relation  to  Industry  and 
Commerce,  p.  190. 
8  American  Uniform  Commercial  Acts,  p.  56. 
"Ibid.,  p.  20. 
"Hearings,  p.  15. 


FINANCING  DISTRIBUTION  261 

which  a  bill  of  lading  has  been  treated  as  an  instrument  which 
is  negotiable  in  the  same  sense  as  bills  of  exchange  and  promis- 
sory notes  are  negotiable.  All  broad  assertions  of  the  nego- 
tiability of  the  bill  of  lading,  when  examined  in  the  light  of 
their  context  and  of  their  actual  application  to  the  very  cases 
in  which  they  were  unguardedly  made  by  the  Court,  will  be 
found  equivalent  merely  to  a  statement  that  the  bill  is  trans- 
ferrable  by  indorsement  and  delivery  and  that  such  indorsement 
and  delivery  transfer  to  the  indorsee  or  holder  such  rights  to,  or 
property  in,  the  goods  as  it  was  the  intention  of  the  parties, 
gathered  from  all  the  circumstances,  to  pass.11 

Bills  of  lading  are  not  currency  any  more  than  mort- 
gages and  deeds  and  warehouse  receipts  are  currency.  They 
are  collateral  security  and  nothing  more.  Nor  will  it  ever 
be  possible  for  them  to  meet  the  requirements  of  the  true 
negotiable  instrument.  An  instrument  to  be  negotiable 
must  conform  to  the  following  requirements:  (1)  it  must 
be  in  writing  and  signed  by  the  maker  or  drawer;  (2)  it 
must  contain  an  unconditional  promise  or  order  to  pay  a 
certain  sum  of  money;  (3)  it  must  be  payable  on  demand, 
or  at  a  fixed  or  determinable  future  time;  (4)  it  must  be 
payable  to  order  or  bearer;  and  (5)  when  the  instrument  is 
addressed  to  a  drawee,  he  must  be  named  or  otherwise  in- 
dicated therein  with  reasonable  certainty.12 

Requirement  (2)  makes  the  vital  and  essential  distinc- 
tion between  bills  of  lading  and  bills  of  exchange  or  prom- 
issory notes.  And  a  use  of  the  words  "currency  of  com- 
merce" in  connection  with  bills  of  lading  or  a  classification 
of  them  indiscriminately  with  checks,  drafts,  and  notes  is 
confusing  and  misleading. 

The  Pomerene  Law  has  not,  therefore,  made  the  bills  of 
lading  "currency  of  commerce"  or  capable  of  taking  the 
place  of  bills  of  exchange.     It  has,  however,  done  a  good 

"The  Bill  of  Lading,  p.  79. 

u  Uniform  Negotiable  Instrument  Law,  Sec.  1. 


262  MAEKETING 

and  great  service ;  it  has  clearly  defined  the  responsible  par- 
ties in  the  shipment  contract  and  thereby  has  made  the 
bills  of  lading  more  readily  acceptable  as  collateral  security 
for  loans  by  means  of  bills  of  exchange.  This  is  true  both 
for  "order"  bills  and  "straight"  bills;  and  this  was  and 
should  have  been  the  essential  purpose  of  the  law.  The 
negotiability  of  order  bills  readily  follows  under  the  pro- 
visions permitting  transfer  of  title. 

But  in  extending  the  liability  of  carriers  something 
else  also  resulted.  The  carriers  were  forced  to  become  a 
kind  of  "guaranty  trust  company."  In  practice,  bills  of 
lading  are  not  made  out  by  the  carrier's  agents  in  the  vast 
majority  of  cases. 

To-day  I  think  it  is  no  exaggeration  to  say  that  not  one  bill 
out  of  a  thousand — and  I  believe  I  could  say  10,000,  is  made  out 
by  the  agent  of  the  railroad  company.  The  business  of  this 
country  could  not  move  for  a  single  day  if  the  bills  of  lading 
were  not  made  out  by  the  shippers.  It  is  not  merely  a  question 
of  the  number  of  agents  or  the  size  of  the  platforms  to  hold 
freight,  but  it  is  a  question  of  time.  There  are  not  enough 
hours  in  the  day,  and  there  is  not  enough  space  in  the  streets 
of  any  large  city  adjoining  the  terminals  of  railroads,  to 
accommodate  the  drays  and  wagons.  .  .  .  That  bill  of  lading 
is  checked  with  the  goods,  if  there  is  time.  If  there  is  not  time, 
it  is  checked  with  the  shipping  order.  .  .  .  The  main  object  in 
life  is  to  get  rid  of  that  drayman.13 

This  law  compels  responsibility  by  the  carrier  on  bills 
filled  out  by  the  shippers,  hastily  checked  by  the  agents  of 
the  carriers,  and  then  signed.  Bills  of  this  character  are 
to  be  raised  to  a  plane  of  unquestioned  reliability.  The 
railroads  claim,  and  with  a  very  sensible  show  of  justifi- 
cation, that  a  careful  checking  up  on  these  bills  is  necessary 

u  Hearings,  61st  Congress,  2d  Session,  p.  101,  testimony  of  H.  L». 
Bond,  general  counsel  of  the  Baltimore  and  Ohio  R.  R. 


FINANCING  DISTRIBUTION  263 

for  such  liability ;  that  this  is  a  new  and  expensive  service 
not  included  in  the  present  rates  charged;  and  that  an 
added  recompense  is  due  them  for  it. 

The  Pomerene  Law,  then,  has  favored  the  shipper,  the 
receiver,  and  the  banker  by  giving  a  better  kind  of  col- 
lateral security,  upon  which  bills  of  exchange  are  more 
confidently  drawn  and  more  readily  accepted.  This  has 
certainly  facilitated  commerce,  has  made  bills  of  lading 
better  commercial  paper.  At  the  same  time,  in  extending 
the  liability  of  the  carriers,  it  has  compelled  them  prac- 
tically to  guarantee  the  integrity  of  shippers  who  make 
out  their  own  bills  of  lading,  and  to  be  responsible  for 
the  acts  of  all  their  agents,  near  and  far,  high  grade  and 
low  grade,  contrary  to  the  decision  in  the  Friedlander  case. 
Furthermore,  it  has  declared  the  negotiability  of  order 
bills  and  the  transferability  of  straight  bills.  The  broad 
lines  of  liability  are  thus  uniformly  laid  down. 

It  may  be  deduced  from  these  considerations  that  the  bill 
of  lading  can  never  become  a  negotiable  instrument  ' '  rank- 
ing on  par  with  a  bill  of  exchange,"  because  their  func- 
tions are  different  in  character  and  because  the  word  "nego- 
tiability" cannot  be  applied  in  the  same  sense  to  both  of 
these  instruments.  Furthermore,  it  seems  clear  that  three 
different  functions  have  been  concentrated  in  this  bill  of 
lading,  namely,  to  act  as  a  receipt,  as  a  contract,  and  as  a 
document  of  title  to  goods,  and  that  the  movement  for  uni- 
formity, by  extending  the  carrier's  liability,  has  added  a 
fourth  as  a  guaranty  of  the  shipper's  integrity  to  the 
banker  and  the  consignee.  That  these  functions  are  merged 
one  into  the  other  by  practical  considerations  is  manifest. 
Some  careful  thinking  and  some  clear  reasoning  will  be 
needed  to  disentangle  them.  And  shooting  through  all 
these  problems  is  the  practical  issue — traffic  must  move. 
It  is  that  issue  which  sets  the  bill  of  lading  apart  from 


264  MARKETING 

other  similar  documents,  such  as  deeds,  mortgages,  and 
warehouse  receipts,  important  as  they  are. 

And,  lastly,  this  discussion  has  revealed  the  great  im- 
portance attached  to  the  bill  of  lading  as  collateral  security. 
When  the  bill  of  exchange,  with  documents  attached,  moves 
"documents  against  acceptance,"  the  bill  of  lading  as- 
sumes transcending  importance;  it  must  be  unquestionable 
security.  This  is  true  in  both  domestic  and  foreign  trade. 
This  piece  of  commercial  paper,  issued  annually  to  an  ex- 
tent that  represents  twenty-five  billion  dollars  worth  of 
commodities,  is  a  commercial  instrument  worthy  of  much 
serious  consideration. 

"The  bill  of  lading  is  an  instrument  for  facilitating 
commerce,  the  importance  of  which  is  not  generally 
known. " 14  It  will  never  fully  come  into  its  own  until  all 
controversies  concerning  interpretation,  responsibility,  and 
liability  are  adjusted.  Toward  this  adjustment  great 
strides  have  been  made.  All  interested  parties  have  been 
heard ;  the  evidence  is  in ;  uniform  laws  are  being  adopted  in 
one  state  after  another;  the  "conditions"  alone  are  under 
fire.  The  decision  of  the  Interstate  Commerce  Commission 
on  these  disputed  points  is  due. 

173.  The  Warehouse  Receipt. — When  goods  enter  a 
warehouse,  of  whatever  character,  the  warehouseman  should 
issue  to  the  owner  of  the  goods  a  receipt  for  them.  This 
receipt  is  called  a  warehouse  receipt.  For  goods  in  for- 
eign or  interstate  commerce  a  warehouse  receipt  is  required 
under  section  17  of  the  U.  S.  Warehouse  Act,  June  30, 1917. 

Sec.  17.  That  for  all  agricultural  products  stored  for  inter- 
state or  foreign  commerce,  or  in  any  place  under  the  exclusive 
jurisdiction  of  the  United  States,  receipts  shall  be  issued  by  the 
warehouseman  conducting  the  same,   but   no   receipts  shall   be 

"McPherson,  op.  tit.,  p.  190. 


FINANCING  DISTRIBUTION  265 

issued  except  for  agricultural  products  actually  stored  in  the 
warehouse  at  the  time  of  the  issuance  thereof. 

It  is  required  under  this  Federal  "Warehouse  Act  that 
every  receipt  shall  embody  the  following  points:  location 
of  the  warehouse;  date  of  issue;  consecutive  number;  to 
whom  deliverable;  rate  of  storage  charges;  description  of 
products,  together  with  quantity  and,  in  the  case  of  pack- 
ages, the  usual  marks  and  weights;  grade,  or  other  class 
stated  in  Federal  grades  if  so  fixed  by  law,  and  otherwise 
the  recognized  standards  to  be  used,  issued  under  U.  S. 
Warehouse  Act;  interest  of  warehouseman  if  any;  state- 
ment of  advances  and  liabilities  for  which  warehouseman 
claims  a  lien;  such  other  items  and  conditions  required  by 
law  as  signature  of  warehouseman  and,  if  not  negotiable, 
without  mention  of  grade  or  class. 

It  is  important  to  distinguish  between  negotiable  and 
non-negotiable  warehouse  receipts.  To  be  negotiable  a  re- 
ceipt must  state  either  that  the  goods  received  and  stored 
under  it  will  be  delivered  to  the  bearer,  or  that  they  will  be 
delivered  to  a  specified  person  or  on  his  order.  The  latter 
type  of  warehouse  receipt,  like  the  check,  requires  endorse- 
ment. A  non-negotiable  receipt  is  one  which  states  that 
the  goods  stored  under  it  will  be  delivered  to  the  depositor 
only  or  only  to  a  specified  person  named  in  the  receipt. 
In  this  case,  the  words  " non-negotiable"  or  "not  nego- 
tiable ' '  should  be  written  across  the  face. 

Neither  the  bill  of  lading  nor  the  warehouse  receipt  can 
fulfill  qualification  two  prescribed  in  the  Uniform  Negotia- 
ble Instrument  Law,  and  so  cannot  be  "currency  of  com- 
merce" in  an  equal  sense  with  the  bill  of  exchange.  If  the 
goods  entering  storage  are  merchantable  in  character  and 
are  gradable  and  carefully  graded,  there  is  no  reason  how- 
ever why  banks  should  not  accept  such  paper  readily  up  to, 
say,  20  per  cent  of  the  market  value  of  the  commodities. 


266  MARKETING 

The  usefulness  of  the  warehouse  receipt  is  intimately 
related  to  grading  and  prices.  A  receipt  is  in  reality  noth- 
ing more  than  evidence  of  the  existence  of  a  certain  amount 
of  goods,  of  a  certain  character.  This  is  quite  apart  from 
the  legal  phase.  It  can  be  acceptable  only  on  the  basis  of 
those  goods.  No  legal-tender  notes  can  be  kept  at  par 
unless  they  are  always  readily  redeemable  in  the  universally 
acceptable  medium  of  exchange.  The  principle  holds  for 
warehouse  receipts.  Merchandise  can  never  become  a  rival 
of  gold  for  a  medium  of  exchange.  In  so  far  as  there  is  a 
difference  to  the  disadvantage  of  commodities,  warehouse 
receipts  will  fall  below  legal-tender  notes,  checks,  and  bills 
of  exchange  as  credit  instruments.  "Warehouse  receipts 
are  becoming  more  widely  acceptable  as  a  basis  for  loans, 
however,  and  when  better  storage  methods  and  sounder, 
more  scientific  grades  are  established  their  usefulness  will 
increase. 

As  an  illustration  of  what  can  be  done  in  extending  the 
use  of  warehouse  receipts,  take  the  following  declaration 
from  the  Federal  Keserve  Board,  Regulation  A,  Series 
1917,  in  relation  to  Section  13  of  the  Federal  Reserve  Act 
dealing  with  rediscounts  of  notes,  drafts,  and  bills  of  ex- 
change. "What  is  true  in  this  particular  case  will  hold  true 
extensively  of  various  kinds  of  commodities. 

Section  VII  of  this  regulation  relates  to  commodity  paper, 
which  can  be  rediscounted  for  a  member  bank  under  the  general 
terms  of  the  regulation,  but  which  may,  if  it  complies  with  the 
conditions  laid  down  in  this  section,  be  discounted  at  a  preferential 
rate,  which  is  now  3^  per  cent  in  most  of  the  Federal  Reserve 
districts. 

Potatoes,  properly  graded  and  packed  and  stored  in  a  weather- 
proof and  responsible  warehouse,  as  evidenced  by  its  receipt, 
would  undoubtedly  constitute  a  readily  marketable,  non-perish- 
able staple  within  the  meaning  of  the  regulation.  The  member 
bank   making   loans    against    warehouse    receipts   for    potatoes 


FINANCING  DISTRIBUTION 


267 


properly  insured  would,  of  course,  have  to  satisfy  itself  as  to 
the  margin  of  its  security  and  the  conditions  of  warehousing, 
but  after  having  done  so,  and  making  the  loan,  it  could  redis- 
count such  paper  with  the  Federal  Reserve  Bank  for  periods 
not  longer  than  90  days. 

The  insistence  upon  proper  grading,  packing,  and  stor- 
ing is  significant.  All  of  these  things  have  to  do  with  the 
marketableness  of  commodities.  Some  warehousemen  guar- 
antee grades,  weights,  and  other  essential  qualities.  Often 
certain  variations  are  stipulated.  But  it  is  clear  that  the 
more  nearly  the  guarantee  approaches  absolute  correctness, 
the  more  valuable  will  be  the  receipt  to  the  person  to 
whom  it  is  transferred.  A  charge  is  sometimes  made  for 
this  guarantee;  in  cotton,  for  example,  it  is  usually  one- 
sixteenth  of  a  cent  per  pound. 


WAREHOUSE   EECEIPT 


A  specimen  of  warehouse  receipt  is  given  herewith.  It 
is  necessary,  of  course,  to  know  what  charges  are  running 
against  the  stored  goods.  In  the  case  of  this  cotton  ware- 
house receipt  the  storage  rates  are  printed  on  the  back. 
They  run  as  follows: 


2G8  MARKETING 


Regular  Storage  Rates 

If  received  uncompressed,  compressed  on  arrival  and 

stored,  first  month 20c  per  bale 

If  received  compressed,  first  month 30c  per  bale 

Extra  storage  each  additional  30  days 8c  per  bale 

If  received  uncompressed  and  stored  uncompressed, 

first  month 35c  per  bale 

Extra  storage  each  additional  30  days 13c  per  bale 

Compressing 40c  per  bale 

Fee  for  tagging,  inspecting,  sampling,  marking,  and 

weighing 10c  per  bale 

Charge  for  delivering  to  wharf,  railroad,  or  team. . .  15c  per  bale 

A  lien  is  also  claimed  on  cotton  covered  hereby  for  any  special 
services  which  may  be  performed  upon,  or  for  the  cotton  covered 
hereby  at  the  request  of  the  depositor  or  the  holders  of  the 
warehouse  receipt,  such  as  extra  weighing,  patching,  turning  out 
for  examination,  and  other  like  charges,  all  in  accordance  with 
the  regular  tariff  provided  therefor. 

174.  The  Trade  Acceptance. — "A  trade  acceptance  is  a 
time  draft  drawn  by  the  seller  of  merchandise  on  the  buyer 
for  the  purchase  price  of  the  goods  and  accepted  by  the 
buyer,  payable  on  a  certain  date,  at  a  certain  place  desig- 
nated on  its  face."  The  financing  of  marketing  may  now 
be  done  in  either  one  of  three  ways :  (1)  on  a  cash  basis,  (2) 
by  open  account,  (3)  by  trade  acceptances.  The  open- 
account  basis  is  peculiar  to  this  country.  Following  the 
Civil  War  financial  conditions  were  so  badly  disturbed  that 
there  were  great  risks  in  long-extended  credits.  In  order 
to  induce  prompt  payments  the  system  of  giving  discounts 
grew  up.  It  is  to  displace  this  open-account  system  that 
trade  acceptances  are  proposed. 

It  has  been  said  that  the  Bank  of  France  handled  in  pre- 
war times  as  much  as  three  billion  dollars  of  acceptances 
in  a  single  year.    The  size  of  these  acceptances  averaged 


FINANCING  DISTRIBUTION  269 

about  $100,  and  some  ran  as  low  as  $1.  A  half  billion  dol- 
lars worth  of  acceptances  were  handled  by  this  bank  in 
sums  less  than  $25.  In  England  this  credit  instrument  is 
in  extensive  use  and  is  known  as  a  "bill."  In  Canada  it  is 
known  as  trade  paper.  Elsewhere  its  use  is  an  old  and  well- 
established  system. 

Trade  acceptances  can  be  used  for  many  kinds  of  com- 
modities. The  Federal  Reserve  Board  has  declared  that  the 
word  "goods"  as  employed  in  its  definition  of  a  trade 
acceptance  includes  goods,  wares,  merchandise,  or  agri- 
cultural products,  including  livestock.  The  time  during 
which  the  credit  instrument  runs  is  usually  90  days  or  less. 
It  may  be  taken  to  a  commercial-paper  house  or  a  bank 
and  discounted  at  once  or  the  seller  of  the  goods  may  hold 
it  in  his  portfolio  until  it  is  nearing  maturity  and  then 
take  it  to  a  bank. 

Advocates  of  the  trade  acceptance  have  declared  that, 
while  it  is  not  expected  to  displace  all  cash  sales  or  all  open- 
account  sales,  it  will  be  found  to  be  a  sounder  and  safer 
method  of  doing  business.  The  acceptance,  it  is  said,  is  the 
second  line  of  defense  in  our  banking  system,  the  best 
assurance  against  panic,  and  it  is  up  to  the  business  men 
of  the  country  to  do  their  part  to  build  up  and  strengthen 
this  line  and  make  possible  to  the  fullest  degree  the  estab- 
lishment of  a  thoroughly  scientific  banking  system.  The 
President  of  a  New  York  City  bank  declared,  "The  trade 
acceptance  is  the  logical  method  of  conducting  the  class  of 
business  transactions  based  upon  credit.  It  carries  on  its 
face  the  evidence  of  efficiency,  economy,  and  security.  The 
trade  acceptance  means  more  to  the  future  of  American 
commerce  than  we  can  realize  at  the  present." 

There  are  several  different  kinds  of  trade  acceptances 
and  no  definite  form  should  be  used  without  a  careful  ex- 
amination. The  accompanying  example  will  serve  to  show 
the  chief  characteristics  of  this  form  of  credit  instrument. 


270  MARKETING 

The  advantages  derived  from  the  use  of  trade  accept- 
ances in  place  of  open  accounts  are  claimed  to  be:  (1)  to 
render  liquid  all  slow  or  "frozen"  accounts,  (2)  to  offer 
a  desirable  investment  by  banks,  (3)  to  check  overbuying 
and  to  strengthen  credit  among  purchasers,  (4)  to  equal- 
ize the  opportunity  for  credit  between  large  and  small  re- 
tailers, (5)  to  make  capital  liquid,  (6)  to  reduce  bad  debts, 
(7)  to  lower  the  general  cost  of  financing  and  (8)  to  put 
the  credit  system  on  a  really  scientific  basis. 


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1&U24&& 


TRADE  ACCEPTANCE 

The  primary  principle  involved  here  is  the  same  as  that 
underlying  the  warehouse  receipt  and  the  bill  of  lading. 
In  so  far  as  possible  commodities  finance  themselves.  The 
accumulating  charges  are  secured  by  the  goods.  In  long 
distance  trading  this  method  eliminates  more  and  more  the 
personal  equation  that  makes  open  accounts  so  difficult  and 
unsafe. 

175.  Functions  of  Credit  Instruments. — Business  blanks 
and  forms  arise  to  facilitate  complex  business  activities.  The 
more  complex,  the  more  far-reaching,  and  the  more  imper- 
sonal the  business  activity,  the  greater  the  need  for  these 
commercial  instruments.  With  the  increasing  need  for  such 
instruments,  there  is  an  increasing  demand  not  only  for 
their  standardization  and  uniformity  but  also  for  their  ab- 


FINANCING  DISTRIBUTION  271 

solute  soundness  and  security.  Credit  instruments  used  in 
financing  the  marketing  are  necessary  for  long  distance  and 
long  time  dealing.  They  save  the  use  of  actual  cash;  they 
greatly  expand  the  service  of  capital ;  they  are  adaptable  to 
a  medium  of  exchange;  they  become  a  necessary  adjunct 
to  the  roundabout  process  of  production;  they  are  prac- 
tically a  prerequisite  for  speculative  business. 

As  has  been  shown,  the  proper  form  of  credit  instru- 
ment enables  the  seller  of  goods  to  be  reimbursed  speedily, 
the  risk  and  burden  of  expense  being  transferred  to  the 
goods  themselves.  The  buyer  also  compels  the  goods  to  bear 
their  financial  burdens  largely  until  they  are  sold.  For  a 
time  the  carrier,  through  the  bill  of  lading,  shares  in  the 
risk  and  responsibility.  All  parties  finally  turn  to  the 
banker  whose  special  function  it  is  to  afford  financial 
service.  Through  the  entire  marketing  process,  the  financ- 
ing is  facilitated  by  one  or  the  other  of  the  credit  instru- 
ments indicated  here. 

Suggestions  for  Study 

The  student  should  here  study  the  financing  problems 
in  connection  with  his  special  commodity.  This  study  will 
be  made  more  concrete  if  it  is  made  through  the  medium  of 
actual  business  forms  which  can  readily  be  obtained.  The 
following  topics  will  serve  for  classroom  study. 

Bill  of  Exchange 

1.  Development  of  the  draft. 

2.  Parties  to  a  draft. 

3.  Charges  on  a  draft. 

4.  Negotiability  of  a  draft. 

5.  Functions  of  a  draft. 

Bill  of  Lading 

1.  Functions  of  a  bill  of  lading. 

2.  Movement  for  uniformity. 


272  MARKETING 

3.  Questions  of  negotiability  and  liability. 

4.  Disputed  questions  under  Uniform  Bill  of  Lading  Act. 

5.  Points  at  issue  between  shippers  and  carriers. 

6.  Commercial  importance  of  the  bill  of  lading. 

7.  Weak  points  in  commercial  use  of  bill  of  lading. 

8.  Future  development  of  bill  of  lading. 

Warehouse  Receipts 

1.  Characteristics  of  the  warehouse  receipt. 

2.  Economic  functions  of  warehouse  receipt. 

3.  Public  interest  in  warehouse  receipts. 

4.  Liabilities  on  warehouse  receipts. 

5.  Negotiability  of  warehouse  receipt. 

6.  Interest    of    producer,    shipper,    carrier,    in    warehouse 

receipt. 

7.  The  receipt  and  the  public  warehouse. 

8.  The  receipt  and  the  private  warehouse. 

Trade  Acceptances 

1.  The  trade  acceptance  and  the  check,  the  bill  of  exchange. 

2.  Advantages   and   disadvantages   of   trade   acceptances   to 

buyer,  seller,  banker. 

3.  Trade  acceptance  and  risk. 

4.  Trade  acceptance  and  speculation. 

5.  Character  of  goods  as  affecting  the  use  of  trade  accept- 

ances. 

6.  Trade  acceptances  abroad. 

7.  Future  of  trade  acceptances. 

Readings  : 

Bills  of  Exchange 

Escher,  Foreign  Exchange. 
Whitaker,  Foreign  Exchange. 

Bills  of  Lading 

Bennett,  The  Bill  of  Lading. 

Interstate  Commerce  Commission,  vol.  xxxviii,  p.  91;  vol.  xli, 
p.  346. 


FINANCING  DISTRIBUTION  273 

Porter,  Law  of  Bills  of  Lading. 
American  Uniform  Commercial  Acts,  pp.  14  et  seq. 
Duncan,    "Uniform    Bill    of    Lading,"    Journal    of    Political 
Economy,  vol.  xxv,  679-703. 

Warehouse  Receipts 

Bulletin  of  American  Warehouseman's  Association,  November, 
1915,  p.  357;  September,  1916,  pp.  282-5;  October,  1916, 
p.  320;  February,  1917,  p.  47;  June,  1917,  pp.  190-206; 
July,  1917,  p.  323;  August,  1917,  p.  257;  October,  1917, 
p.  313;  November,  117,  p.  341. 

Annals  of  the  American  Academy  of  Political  and  Social 
Science,  September,  1911,  pp.  281-91. 

National  City  Bank,  "U.  S.  Warehouse  Act." 

U.  S.  Department  of  Commerce  and  Labor,  Bureau  of  Statis- 
tics, Bulletin  No.  4,  Series  1903-1904,  p.  1086. 

Trade  Acceptances 

Mathewson,  Acceptances,  Trade  and  Bankers'. 

Treman,  Trade  Acceptances. 

Guaranty  Trust  Company,  "Acceptances"   (pamphlet). 

National    City    Bank,    "Progress    in    Development    of    Trade 

Acceptances"   (pamphlet). 
Tingley,  Trade  Acceptances  vs.  Open-Account  Credit. 
How  Merchants  Can  Use  Trade  Acceptances   (Bernhard  and 

Scholle  Co.). 


PART  II 
MANUFACTURED    PRODUCTS 


CHAPTER  XIII 

ANALYSIS  OF  THE  COMMODITY 

176.  Differences  Between  Raw  Materials  and  Finished 
Goods. — Production  is  the  creation  of  value;  production 
adds  to  economic  goods  time,  place,  and  form  utilities.  The 
creation  of  time  and  place  utilities  is  generally  the  work  of 
middlemen.  The  creation  of  form  utilities  is  the  work  of 
the  manufacturer.  As  has  already  been  indicated,  the 
fundamental  difference,  from  a  commercial  point  of  view, 
between  raw  materials  and  foodstuffs  on  the  one  hand  and 
finished  products  on  the  other,  lies  in  the  fact  that  the  for- 
mer must  be  taken  as  the  forces  of  nature  produce  them, 
while  the  latter  can  be  shaped  according  to  a  preconceived 
plan.  In  one  case  there  is  control  of  elements  that  go  into 
commodities  and  of  the  form  utilities  to  be  created ;  in  the 
other  case  this  is  not  true. 

This  distinction  affects  the  entire  problem  of  analyzing 
the  commodity.  In  raw  materials,  the  commodities  are 
once  removed  from  human  wants;  in  finished  goods  the 
application  is  direct.  In  raw  materials  and  foodstuffs  the 
problem  is  broadly  one  of  supply  and  demand ;  in  finished 
goods  the  problem  is  one  of  adaptation  and  fitness.  In 
raw  materials  and  foodstuffs  the  task  of  analyzing  the  com- 
modity is  to  study  the  characteristics  and  the  supply.  In 
finished  goods,  the  problem  is  one  of  the  historical  develop- 
ment, the  modifiable  qualities  in  relation  to  their  uses, 
of  supply  in  relation  to  the  purchasing  problem,  the  stock 
plan,  seasonal  buying,  etc.,  of  the  relation  to  raw  materials, 
the  question  of  working  capital,  grading,  the  possibility  of 

277 


278  MARKETING 

a  technical  or  scientific  analysis,  and  the  relation  to  market 
demand.  The  aim  of  analysis  in  raw  materials  is  to  secure 
scientific  production ;  the  aim  of  analysis  in  finished  goods 
is  to  promote  scientific  selling. 

177.  Historical  Development. — The  first  logical  step  in 
the  analysis  of  a  manufactured  commodity  is  to  trace  the 
history  of  its  development.  Through  the  years  goods  have 
taken  on  one  quality  after  another  to  satisfy  new  wants  or 
to  satisfy  more  completely  an  established  want.  An  his- 
torical background  enables  the  one  handling  the  commodity 
to  find  a  human  interest  in  many  a  commonplace  thing.  For 
example,  there  is  almost  a  human  touch  that  makes  the 
whole  world  kin  in  the  fact  that  typewriters  were  first  in- 
vented for  the  use  of  the  blind;  there  was  no  need,  there- 
fore, for  the  writing  to  be  visible. 

The  historical  survey  should  include  the  various  steps 
in  the  manufacturing  process  of  most  commodities.  The 
salesman  handling  men's  clothing  should  be  interested  to 
know  that  the  making  of  each  coat  has  sixty-four  distinct 
operations  and  to  know  what  each  operation  is.  The  well 
informed  furniture  dealer  should  be  interested  to  know  how 
furniture  is  made,  as  well  as  the  styles  and  the  periods 
of  introduction  of  each.  Association  and  sentiment  have 
much  to  do  with  the  consumer's  attitude  toward  the  pic- 
tures and  furniture  with  which  he  lives,  as  well  as  with 
the  literature  he  reads.  The  best  source  for  both  of  these 
is  a  knowledge  of  historical  facts.  One  cannot  help  having 
a  peculiar  interest  in  the  fabric  he  handles  after  he  has 
once  seen  the  machines  weaving  it  with  almost  uncanny 
skill  and  intelligence.  This  is  particularly  true  of  the 
machines  that  stop  when  a  thread  breaks  or  something  goes 
wrong.  One  looks  with  a  new  interest  at  the  great  cata- 
logues put  out  by  one  of  the  leading  mail-order  houses 
after  he  has  seen  the  machines  with  steel  fingers,  each 
reaching  out  to  pick  up  its  quota  of  pages,  and  stopping, 


ANALYSIS  OF  THE  COMMODITY  279 

when  a  mistake  is  made,  with  the  steel  fingers  raised  to 
point  the  place. 

The  manager  of  a  large  cotton  mill,  who  had  come  up 
from  the  ranks  step  by  step  from  doffer  boy  to  manager, 
declared  that  for  him  there  was  no  monotony  in  a  cotton 
mill.  He  said  he  knew  every  machine  in  the  mill ;  each  one 
had  a  personality  to  him.  Weaving  cotton,  he  said,  is  not  a 
commonplace,  monotonous  job;  it  is  a  romance.  The  hu- 
manizing of  his  engine  by  an  engineer,  the  loving  care  of  a 
skilled  carpenter  of  his  tools,  the  devotion  of  a  violinist 
to  his  violin,  are  merely  illustrations  of  a  sympathetic  atti- 
tude that  is  possible  in  dealing  with  almost  any  kind  of  a 
commodity. 

Suppose  one  should  undertake  a  study  of  the  designs  of 
patterns  in  tapestry,  in  wall  paper,  in  rugs,  in  carpets. 
He  would  find  himself  immediately  fascinated  by  the  sub- 
ject. He  would  be  led  along  strange,  alluring  paths  of 
oriental  mythology,  superstition,  and  religion;  he  would 
find  himself  in  the  midst  of  strange  phantasy  and  poetic 
symbolism.  Even  the  many  insignificant  notions  in  the  bar- 
gain basement  can  be  humanized  thus.  No  commodity 
passes  through  the  market  except  to  meet  some  human  want. 
Skillfully  or  crudely  each  article  has  been  devised  with  such 
an  aim  in  view.  Think  of  the  "dinky"  steam  engines  first 
invented  compared  with  the  giant  moguls  of  to-day.  Every- 
where there  are  human  interest  stories  in  the  development 
of  commodities;  everywhere  there  are  interesting  facts  to 
serve  as  a  background  for  matching  goods  to  human  wants. 

Scientific  management  endeavors  to  make  each  job  inter- 
esting to  the  worker  engaged  at  it.  He  is  taught  to  look  at 
the  task  analytically,  to  make  a  study  of  it,  a  live  problem 
of  it.  Thus,  his  interest  is  stimulated  and  sustained.  In 
the  historical  study  of  merchandise,  likewise,  there  is  the 
same  opportunity.  Cotton  can  be  followed  from  the  fields 
of  the  South  to  the  finished  garment ;  wool  from  the  ranges 


280  MARKETING 

to  the  manufactured  article;  rubber  from  plantation,  or 
far-away,  strange  tropical  forests  where  wild  or  half-civi- 
lized natives  exploit  it,  to  the  automobile  tire ;  furs  from  the 
wild  haunts  of  fur-bearing  animals  in  the  North  to  the  gor- 
geous coat  of  the  rich.  There  is  here  no  limit  to  knowledge 
or  to  interest.  It  is  the  story  of  the  human  race  wresting 
a  livelihood  from  a  niggard  earth. 

178.  Philosophical  Analysis. — One  may  approach  the 
commodity  with  an  abstract  or  philosophical  plan  of  analy- 
sis. The  commodity  may  be  taken  as  a  thing  apart.  From 
this  point  of  view,  any  article  may  be  considered,  first,  as  a 
thing  in  itself  and,  second,  as  to  its  service  in  relation  to  the 
consumer.  When  a  commodity  is  considered  as  a  thing  in  it- 
self, the  following  queries  arise:  what  the  commodity  is, 
of  what  it  is  made,  for  what  purpose  it  is  made,  historical 
development,  and  value.  Its  service  in  relation  to  the  con- 
sumer involves  the  inquiries  as  to  whether  or  not  it  is  for 
the  customer's  own  use,  to  be  sold  by  him  at  a  profit,  com- 
parison with  rival  and  substitute  goods,  etc. 

In  an  attempt  to  put  the  purchasing  for  a  mercantile  es- 
tablishment upon  a  scientific  basis,  it  has  been  suggested  that 
the  buying  should  be  done  in  a  "new  way."  The  purchas- 
ing agent  should  first  seek  all  available  information  in  re- 
gard to  the  materials  handled,  such  as  sources  and  volume 
of  supply,  graphic  record  of  prices  paid  in  the  past,  mar- 
ket movements,  forecasts  of  supply  in  relation  to  consump- 
tion, price  fluctuations,  product  tendencies  toward  change. 
There  should  then  be  an  inspection  system,  a  series  of 
laboratory  reports  of  tests  of  materials,  the  behavior  of 
materials  in  use. 

Another  method  for  analyzing  has  been  suggested  on  the 
following  basis:  There  are  three  general  considerations, 
material,  commercial,  and  monetary.  Under  the  material 
considerations  are  the  properties  of  the  commodity,  the 
appearance,  the  trustworthiness,  the  quality,  the  utility,  and 


ANALYSIS  OF  THE  COMMODITY  281 

the  differentiation.  Under  commercial  considerations  are 
the  advertisability,  depending  upon  scope  of  utility ;  source 
of  commodity;  substance  of  commodity,  both  tangible  and 
intangible ;  groups  of  commodities  whether  constituent,  col- 
lective, or  integral;  classes  of  commodities,  such  as  novel- 
ties or  luxuries,  necessities,  staples ;  and  kinds  of  commodi- 
ties, such  as  meritorious,  mediocre,  and  impractical.1 

179.  Analysis  Dependent  on  Point  of  View. — Naturally 
the  kind  of  analysis  to  be  made  will  depend  upon  the  point 
of  view  from  which  the  subject  is  approached.  The  tech- 
nical scientific  attitude  is  illustrated  by  the  industrial  chem- 
ist. The  merchant  as  well  as  the  manufacturer  can  make 
use  of  the  chemist,  as  the  following  statement  shows : 

In  the  stress  of  highly  competitive  production,  in  the  relative 
scarcity  of  raw  products,  in  the  mounting  cost  of  labor,  in  the 
keenness  to  excel  in  America's  specialty — quantity  production, 
in  the  very  skill  of  the  chemist  in  evolving  substitutes  and  less 
expensive  ways  of  doing  things — as  well  as  finding  better  ways 
of  doing  things — how  can  the  retailer  always  be  sure  that  he 
is  getting  what  he  expected — how  can  he  be  sure  that  the  mer- 
chandise he  is  selling  to  his  customers  will  prove  to  be  as 
represented?  And  how  can  the  customer  know?  In  the  light 
of  modern  conditions  there  is  one  answer.  Only  the  chemist  can 
tell !  The  men  who  work  out  the  secret  processes  of  industry 
are  the  only  men  who  can  tell  or  approximate  what  the  result 
of  those  processes  will  do — in  terms  of  health — wear — service. 
For  several  years  we  have  not  been  content  to  take  the  word 
of  mill  or  manufacturer;  be  they  ever  so  well  intentioned — as  to 
whether,  for  example,  a  fabric  was  all  wool — or  whether  it  was 
fast  dye. 

We  have  gone  to  the  chemist.  And  when  a  fabric  was  not 
all  wool  we  have  refused  to  sell  the  goods;  or  if  cotton  really 
added  merit  to  the  fabric,  we  have  not  hesitated  to  say  so.  We 
have  gone  to  the  chemist  for   our  guidance,   in   making  large 

1  Cf.  Wadsworth,  Advertising. 


282  MARKETING 

purchases — for  example,  of  hosiery  and  other  apparel.  So  that, 
in  addition  to  the  keen  eye  and  sensitive  fingertips  of  the  expe- 
rienced buyer,  we  added  the  eternal  verity  of  the  test  tube  and 
the  microscope.2 

A  combined  scientific  and  commercial  analysis  was  made 
by  the  manufacturers  of  a  widely-known  cooking-fat  com- 
pound. They  had  been  for  years  in  the  business  of  making 
and  selling  a  mechanically-mixed  lard  compound,  made 
up  of  cottonseed  oil  and  oleostearine.  They  knew,  there- 
fore, the  demand  for  such  a  commodity  and  the  special 
qualities  required.  By  means  of  experiments  carried  out 
through  a  period  of  four  years,  they  succeeded  in  produc- 
ing the  right  kind  of  commodity.  This  task  was  accom- 
plished by  examining  all  the  cooking  fats  in  existence  and 
listing  their  weak  points.  Through  a  process  of  hydrogeni- 
zation,  they  were  able  to  correct  such  faults  as  the  tendency 
to  become  rancid,  the  large  content  of  stearic  acid,  the  low 
burning  point.  Here  is  an  instance  where  a  commodity 
was  deliberately  and  carefully  built  up  to  satisfy  an  es- 
tablished and  well-defined  demand. 

A  retailer,  who  handles  textile  goods  of  various  kinds, 
has  advertised  that  he  secured  the  written  opinion  of  thirty- 
six  experts  as  to  the  best  way  to  shrink  cloth,  in  order  that 
his  products  might  thereby  be  the  better.  A  manufacturer 
of  shoes  claims  that  he  has  specialists  in  every  branch  of 
the  shoe  business  who  make  a  continual  study  of  factory 
methods,  manufacturing  policies,  material,  production, 
styles,  and  workmanship.  Every  new  process  or  idea  that 
promises  improvement  is  tried  out.  "Every  shoe  we  sell 
evidences  the  wisdom  and  value  of  this  policy." 

A  large  mail-order  house  maintains  a  well-equipped  lab- 
oratory for  making  both  chemical  and  mechanical  tests  of 
the  commodities  which  it  handles.     Since  the  policy  of 

*An  advertisement. 


ANALYSIS  OF  THE  COMMODITY  283 

this  house  is  to  guarantee  the  goods  to  be  as  described  in  the 
catalogues  it  issues,  sound  business  practice  demands  that 
the  goods  shall  be  tested  as  they  come  from  the  manufac- 
turer. A  special  group  of  men  are  constantly  busied  in 
selecting  commodities  in  stock,  samples  of  which  are  sent 
to  the  laboratory  for  testing.  If  all-wool  cloth  is  ordered 
from  the  manufacturer,  this  cloth  is  mechanically  tested. 
Canned  and  preserved  foods  are  tested  chemically. 

Tests  and  analyses  will,  then,  be  made  from  various  points 
of  view,  depending  largely  upon  the  function  performed 
and  the  immediate  or  special  interest.  A  pamphlet  recently 
issued  by  the  Silk  Association  of  America  urges  one  in  buy- 
ing clothes  to  "look  to  the  seam."  "Your  only  protection 
against  extravagant  cheapness  and  disappointment  is  to  ask 
always  before  you  buy:  'Is  it  sewed  with  silk?'  "  The 
ultimate  distinction  and  durability,  the  Association  claims, 
depend  upon  the  seams  being  sewed  with  silk.  On  the  other 
hand,  the  silk  thread  itself  has  its  essential  tests  as  illus- 
trated by  the  following: 

Official  Tests  Silk  vs.  Cotton 

(Made  by  the  United  States  Conditioning  and  Testing  Company) 

Test  No.  1.  This  test  of  the  tensile  or  breaking  strength  of 
sewing  silk  and  sewing  cotton  of  the  same  size  was  made  by 
the  United  States  Conditioning  and  Testing  Company.  White 
Silk,  Size  A,  proved  to  be  47  per  cent  stronger  than  white  mer- 
cerized cotton  equal  in  size. 

Test  No.  2.  Made  by  the  United  States  Conditioning  and 
Testing  Company.  Black  Silk  Machine  Twist  and  Black  Mer- 
cerized Cotton  equal  in  size  were  tested  for  elasticity.  The  silk 
proved  to  be  more  than  three  time3  as  elastic  as  the  cotton  thread. 

Test  No.  3.  This  test  of  the  tensile  or  breaking  strength  of 
silk  and  cotton  seams  was  made.  A  strong  inelastic  cloth  was 
sewed  with  white  silk,  size  A,  and  a  second  piece  was  sewed 
with  white  cotton  equal  in  size,  both  threads  having  the  same 
yardage  per  ounce.    Then  each  sample  was  subjected  to  a  tension 


284  MARKETING 

test.  The  silk  seams  were  stronger  than  the  material,  while  the 
cotton  seams  broke. 

Test  No.  4.  In  the  sample  sewed  with  silk  the  cloth  itself 
ripped  before  the  silk  stitches  of  the  seam  gave  way,  but  before 
the  material  broke  the  silk  seam  had  withstood  a  strain  82  per 
cent  greater  than  the  strain  under  which  the  cotton  thread  had 
started  to  rip. 

Test  No.  5.  Sample  sewed  with  black  silk,  size  B,  was  nearly 
four  times  stronger  than  a  seam  sewed  with  black  cotton  equal 
in  size. 

From  the  point  of  view  of  specific  uses  a  commodity  may 
be  analyzed,  first,  for  the  kind  and  quality  of  the  raw  ma- 
terial entering  into  its  composition;  second,  for  the  degTee 
of  care  with  which  the  article  has  been  made ;  and,  third,  for 
the  absence  in  the  finished  product  of  any  material  or  ma- 
terials detrimental  to  its  use.  The  Federal  Government  is 
the  greatest  consumer  of  paper  in  the  country  and  makes 
the  following  three  kinds  of  tests:  "First,  physical  tests 
are  made  to  determine  the  weight  per  ream.  The  quad- 
rant paper  scale  is  used  for  this  purpose.  To  determine 
thickness  of  the  sheet  a  micrometer  having  a  gauge  reading 
to  1-10,000  of  an  inch  is  utilized.  To  learn  the  bursting 
strength  a  Mullen  strength  tester  is  employed.  To  deter- 
mine the  tension  or  breaking  strength  a  Schopper  folding 
machine  is  brought  into  play.  The  second  class  of  tests 
which  the  government  makes  is  microscopical  tests.  By 
these,  the  kinds  of  fiber  used  and  the  relative  amounts  are 
determined.  The  third  kind  of  test  is  a  chemical  test. 
This  is  made  to  ascertain  the  amount  and  the  nature  of  the 
coloring  matter  used. ' ' 3 

180.  Character  of  Demand. — A  part  of  the  analysis  of 
a  commodity  from  a  commercial  point  of  view  is  a  study 
of  certain  characteristics  of  demand.     The  article  may 

•Lsvia.  The  Marketing  of  Wrapping  Paper,  p.  57 


ANALYSIS  OF  THE  COMMODITY  285 

have  only  an  anticipated  or  potential  demand.  In  this  case 
the  problem  is  first  to  adjust  the  goods  to  a  known  active 
or  potential  human  want.  Civilization  progresses  through 
education  and  education  is  in  part  the  development  of  new 
economic  wants.  This  is  a  long,  drawn-out  process.  A 
new  song  may  spread  over  the  country  in  a  single  season, 
but  the  popular  song  demand  is  already  there.  Attention 
has  been  called  to  the  fact  that  it  has  required  as  much  as 
twenty  years  to  educate  a  man  to  put  a  telephone  in  his 
house;  that  Edison  pointed  out  the  possibilities  of  his 
newly-invented  phonograph  in  business  correspondence  in 
1890,  but  the  demand  for  talking  machines  among  business 
men  did  not  develop  substantially  for  almost  twenty  years ; 
that  the  thermos  bottle  was  introduced  in  1907  by  a  care- 
fully-planned educational  campaign,  but  only  six  years  later 
did  a  demand  arise  for  it  among  workmen  for  carrying  hot 
liquids  in  their  dinner  pails.4 

Or  there  may  be  a  demand  already  developed  for  a  given 
commodity.  The  problem  then  becomes  one  of  better  ad- 
justment, one  of  competition  in  price,  quality,  or  service. 
It  is  said  that  American  ingenuity  enabled  hot-water  bot- 
tles of  domestic  make  to  gain  headway  in  Great  Britain  by 
adding  a  ring  in  the  bottom  by  which  it  could  be  hung  up 
to  dry.  The  mail-order  houses  have  found  that  farmers 
will  buy  starch  in  three-pound  instead  of  one-pound  pack- 
ages, coffee  in  three  to  five-pound  packages,  and  crackers 
in  ten-pound  cartons. 

A  commodity  may  be  overdeveloped  for  the  demand,  not 
only  in  the  sense  that  it  is  made  in  too  large  amounts,  but 
also  in  the  sense  that  it  is  overdone  in  itself.  Many  styles 
of  goods  that  hold  up  in  such  metropolitan  centers  as  New 
York  City  would  not  sell  in  a  small-town  market.  But  even 
this   statement  needs   qualification.     Shoe   manufacturers 

4MacMartin,  "Planning  an  Advertising  Campaign  for  a  Manu- 
facturer," Part  I,  p.  12. 


286  MARKETING 

have  found  certain  small-town  retail  shoe  stores  in  the 
Southwest  that  carry  only  a  stock  of  high-grade  shoes,  such 
as  would  usually  be  carried  in  a  large  market  center.  Com- 
munity taste  and  purchasing  power  are  the  determining 
factors.  Nevertheless,  a  commodity  may  be  overlaunched, 
like  a  street-railway  system  built  on  the  possible  growth 
of  the  next  fifty  years. 

The  taste  of  a  community,  that  is,  its  standard  of  living, 
may  require  certain  commodities  to  maintain  this  standard. 
Even  the  law  courts  have  declared  that  certain  conveni- 
ences and  comforts  are  to  be  considered  essential  in  certain 
strata  of  society.  But  apart  from  this  phase,  there  are  the 
essentials  of  modern  life  generally  comprehended  in  the 
term  "a  reasonable  minimum  standard  of  living."  These 
things  have  to  do  with  food,  shelter,  clothing,  fuel,  light, 
heat,  and  various  sundries.  This  class  of  goods  may  be 
called  necessities.  The  problem  of  marketing  them  is  fairly 
distinct. 

Over  and  beyond  the  necessities  stretches  the  range  of 
luxuries.  These  are  the  extras  of  living.  The  line  between 
the  two  groups  is  a  shadowy  one  but  the  two  fields  in  general 
are  distinct.  Again,  it  is  largely  a  matter  of  taste  and  pur- 
chasing power.  The  same  commodity,  however,  may  be 
in  one  case  a  necessity  and  in  another  case  a  luxury.  An 
automobile  may  be  used  as  a  delivery  wagon  or  a  touring 
car.  A  farmer  may  haul  wheat  to  the  local  market  in  his 
automobile  or  take  his  family  for  a  ride. 

Furthermore,  commodities  are  constantly  passing  from 
the  luxury  group  to  the  necessity  group.  This  is  economic 
progress.  Formerly  furniture  was  built  strictly  for  utility 
purposes;  to-day  it  has  a  large  style  element  in  it.  As 
civilization  advances,  it  is  hard  to  distinguish  between  the 
luxury  of  yesterday  and  the  necessity  of  to-day.  The  tele- 
phone was  once  a  great  luxury,  even  in  a  business  establish- 
ment; so  also  the  typewriter.    A  camera  may  occasionally 


ANALYSIS  OF  THE  COMMODITY  287 

be  used  in  scientific  researches  and  experimentation,  but 
on  the  whole  it  will  be  classified  as  a  luxury.  A  commodity 
may  work  its  way  into  the  fiber  of  a  living  standard  and  be 
transferred  from  the  status  of  a  luxury  to  that  of  a  neces- 
sity. 

The  demand  may  be  either  continuous  or  seasonal.  In 
general,  style  goods  are  seasonal.  There  are  hats  for  spring, 
summer,  autumn,  and  winter.  The  demand  for  cameras 
is  larger  in  the  open-air  seasons.  Text  books  are  in  demand 
when  the  schools  are  in  session,  and  especially  at  the  begin- 
ning of  the  term.  The  commodities  making  up  the  large 
bulk  of  goods  passing  through  the  market  have  individual 
problems  of  their  own.  Consumption  of  bread  varies  with 
the  weather,  daily  as  well  as  seasonally.  More  baking,  for 
example,  is  done  in  the  family  kitchen  in  the  autumn  and 
winter  than  in  the  spring  and  summer.  The  large  bakeries 
have  men  skilled  to  estimate  what  these  changes  in  demand 
will  be.  Retail  stores  will  take  advantage  of  sudden  changes 
in  weather  to  advertise  rubbers  or  umbrellas  or  raincoats. 
The  ups  and  downs  of  demand,  for  whatever  cause,  are  a 
part  of  the  commodity  analysis. 

A  given  commodity  may  serve  directly  to  satisfy  a  hu- 
man want,  or  may  be  used  in  conjunction  with  other  com- 
modities. The  business  of  making  automobile  accessories 
may  be  called  a  contingent  business,  because  the  demand  for 
its  products  is  gauged  by  the  demand  for  automobiles. 
Subsidiary  industries,  in  the  sense  of  contingent,  or  de- 
pendent, industries,  are  once  removed  from  direct  contact 
with  the  market.  Just  as  the  market  for  stocks  and  bonds 
is  contingent  upon  the  capital  that  is  free  for  such  invest- 
ment, so  the  demand  for  dependent  products  varies  with 
the  demand  for  the  primary  product.  A  study  of  the  de- 
mand for  a  commodity  verges  constantly  into  a  study  of 
the  market.  Nevertheless,  a  complete  analysis  of  a  product 
includes  an  understanding  of  all  the  peculiarities  and  flue- 


288  MARKETING 

tuations  of  the  demand.  All  of  these  things  affect  the 
marketing  problem. 

181.  Supply  of  Commodity. — The  supply  of  a  finished 
product  may,  in  normal  times,  be  controlled  by  the  policy 
of  the  house.  Every  up-to-date  mercantile  establishment 
has  its  purchasing  plan  in  the  same  way  that  a  manufac- 
turer has  his  purchasing  plan.  The  formulation  of  this 
plan  is  a  part  of  commodity  analysis. 

The  purchasing  problem  is  sometimes  relatively  simple, 
but  often  is  very  complex.  A  specialty  store  has  practi- 
cally a  single  line  of  goods  to  keep  in  stock.  The  retail 
grocer  has  hundreds,  the  druggist  has  thousands  of  articles 
to  handle.  A  large  hardware  jobber  carries  82,000  dif- 
ferent articles.  New  lines  have  been  added  from  time  to 
time  to  the  original  shelf  hardware  upon  which  his  busi- 
ness was  founded,  so  as  to  include  harness,  paints,  fencing, 
refrigerators,  washing  machines,  sporting  goods,  cheap 
jewelry,  automobile  accessories,  and  so  on. 

The  large  mail-order  houses  must  keep  enough  stock  on 
their  shelves  to  meet  without  delay  the  orders  from  their 
thousands  upon  thousands  of  customers.  Managers  of  the 
various  departments  in  these  catalogue  houses  must  in  some 
way  anticipate  the  demand  for  each  kind  of  commodity 
under  their  control.  When  the  order  is  in,  it  is  then  too 
late  to  make  out  the  stock  plan. 

Whether  simple  or  complex,  the  stock  plan,  to  be  made 
scientifically,  requires  a  careful  analysis  of  commodities. 
A  manufacturer  of  rivets,  screws,  and  other  small  linkage 
parts  has  studied  so  carefully  the  various  classes  of  his 
commodities  in  relation  to  the  demand  for  them,  that  he 
can  prejudge  to  a  nicety  how  many  of  each  type  to  make. 
The  retailer  of  shoes  can  adjust  his  sizes,  styles,  and  quali- 
ties by  systematic  study  to  a  seasonal  demand.  The  buyer 
for  a  clothing  manufacturer  will  estimate,  as  the  time  for 
"laying  out"  the  spring  or  fall  line  arrives,  the  probable 


ANALYSIS  OF  THE  COMMODITY  289 

expenditure  necessary,  say,  for  woolens  in  each  line.  ' '  From 
his  knowledge  of  the  various  costs  in  the  manufacture  of  a 
garment,  he  estimates  that  for  his  $14.50  suit  line  he  can 
afford  woolens  at  $1.00  per  yard,  for  his  $17.50  line,  wool- 
ens at  $1,121/2.  Thus,  he  figures  that  he  will  require  500 
bolts  of  cloth  priced  at  $1.00— $1.12^  a  yard;  750  bolts 
of  cloth  at  $1.121/2— $1.25  a  yard.  In  addition  he  at- 
tempts to  anticipate  the  popular  styles  in  woolens  for  the 
coming  season.  He  knows  the  class  of  patterns  desirable 
for  his  trade.  He  knows  in  a  general  way  the  styles  ema- 
nating from  London." 

With  such  knowledge  as  this,  the  purchasing  agent  will 
go  to  the  great  Eastern  markets.  New  York  City  is  the 
center  of  the  mill  offices,  and  likewise  contains  magnificent 
sample  rooms.  These  samples  the  purchasing  agent  ex- 
amines for  quality,  weight,  elasticity,  hardness,  cotton 
mixtures.  Coarseness,  elasticity,  and  mixture  of  cotton  can 
be  determined  by  the  "feel"  of  the  goods.  A  sure  test  of 
cloth  fibers  is  to  burn  them.  Slow  burning  and  failure  of 
the  residue  to  disappear  signify  much  cotton.  Such  a 
process  in  selecting  quality  and  styles  is  analysis  of  a  most 
direct  and  practical  kind.  A  broad,  detailed  knowledge  is 
essential  for  intelligent  buying. 

The  qualifications  of  the  purchasing  agent  include  the 
following:  (1)  a  knowledge  of  supply,  sources  always 
available,  reliability  of  sources,  quantities  produced,  pos- 
sible substitutes;  (2)  a  thorough  knowledge  of  materials, 
i.e.,  a  detailed  specification  of  all  kinds,  an  expert  knowl- 
edge of  all  grades,  laboratory  or  other  tests,  simplest  de- 
pendable methods  of  ascertaining  qualities,  and  how  goods 
stand  up  under  wear;  (3)  a  knowledge  of  prices,  by  kinds, 
qualities,  grades,  etc.,  past  and  present,  and  tendencies, 
seasonal  variations,  dominant  price  factors,  discounts.  This 
is  only  another  way  of  saying  that  the  purchasing  agent 
must  know  the  goods  which  he  buys. 


290  MARKETING 

A  most  difficult  problem  is  to  evaluate  the  qualities  of 
goods  purchased.  Is  style  or  utility  the  important  factor? 
The  following  is  an  attempt  to  weight  the  essential  qualities 
or  different  grades  of  women's  ready-to-wear  garments:8 

Women's   Ready-To-Weab 
Inexpensive  Grades 

1.  Decision  on  price  and  delivery 40% 

2.  Selection  of  styles,  colors,  and  sizes 30% 

3.  Determination  of  qualities,  workmanship,  finish 20% 

4.  Arrangement  of  terms   and   discounts 10% 

Medium  Priced  Grades 

1.  Determination  of  qualities,  workmanship,  finish 35% 

2.  Selection   of  styles,   colors,   and   sizes 30% 

3.  Decision   on    prices   and    deliveries 20% 

4.  Arrangement   of  terms   and   discounts 15% 

High  Grades 

1.  Selection  of  styles,  colors,  and  sizes 35% 

2.  Determination  of  qualities,  workmanship,  finish 30% 

3.  Decision  on  prices  and  deliveries 20% 

4.  Arrangement  of  terms  and  discounts 15% 

One  will  not  be  deceived  by  the  specific  character  of 
these  percentages,  but  the  relative  importance  of  the  vari- 
ous considerations  is  of  value.  On  inexpensive  goods,  price 
is  of  prime  importance,  but  recedes  to  third  place  in  higher 
grades.  Styles  have  a  subordinate  place  in  buying  inexpen- 
sive grades ;  in  buying  high  grades,  it  is  the  first  considera- 
tion. It  is  to  be  noted  further  that  "terms  and  discounts" 
are  considered  last  in  all  grades. 

A  further  example  of  the  practical  analysis  of  goods  may 
be  taken  from  the  same  source:6 


1  Field,  'Retail  Buying,  p.  55. 
'Ibid.,  p.  56. 


ANALYSIS  OF  THE  COMMODITY  291 

Medium  Priced  Ready-To- Wear  Merchandise 

1.    Determination  of  qualities,  workmanship,  and  finish: 

a.  Testing  for  raw  material 6% 

b.  Judging  process  of  manufacture  3% 

c.  Estimating  cost  of  manufacture  4% 

d.  Feeling  for  weight 2% 

e.  Sizing  up  any  guarantee  6% 

f.  Examining  for  flaws 5% 

g.  Valuing  the  finish  (machine  or  hand)    4% 

h.  Ascertaining  care  used  in  exterior  finish 2% 

i.  Ascertaining  care  used  in  interior  finish 3% 

Total   35% 

Once  again  the  definite  figure  is  of  less  importance  than 
the  relative  value.  It  is  interesting  to  note  that  the 
guarantee  is  considered  the  most  important  single  factor 
in  the  analysis  of  qualities,  workmanship,  and  finish.  The 
reason  doubtless  is  that  a  guarantee  may  lighten  the  risks 
of  judgment  on  all  the  items.  This  practical  judgment 
of  goods  is  the  application  of  principles  of  analysis  to 
them.  Sooner  or  later  the  characteristics  of  a  commodity 
must  be  evaluated  in  reference  to  demand  and  price.  Part 
of  this  task  falls  upon  the  purchasing  agent.  The  salesman 
attempts  to  realize  on  the  purchasing  agent's  judgment. 

182.  Analysis  a  Middleman  Function. — The  analysis  of 
finished  goods,  especially  relative  to  market  demand  and 
price,  is  the  function  of  the  merchant.  The  manufacturer 
seeks  through  a  careful  analysis  of  materials  and  by 
standardized  processes  to  turn  out  a  product  true  in  every 
respect  to  a  preconceived  pattern.  It  is  the  task  of  the 
merchant  to  know  how  such  commodities  will  satisfy  human 
wants.  To  the  druggist  is  left  the  job  of  filling  a  prescrip- 
tion; the  retail  merchant  may  be  handling  commodities 
equally  important  to  health  and  comfort.     The  druggist 


292  MARKETING 

is  presumed  to  be  trained  and  to  be  equipped  with  a 
laboratory  for  his  work;  the  retailer  needs  to  rise  to  the 
same  level. 

There  is  no  reason  why  retail  stores  should  not  be 
equipped  with  laboratories  and  manned  by  clerks  who 
have  some  claim  to  being  experts.  In  some  kinds  of  retail 
business  a  laboratory  may  become  as  important  as  the 
refrigerator.  In  that  case  there  will  be  less  need  for  a 
pure  food  and  drug  act.  Wholesalers  are  already  realizing 
the  value  of  careful  scientific  analysis  of  the  commodities 
they  handle. 

The  middleman,  however,  is  likely  to  classify  his  goods 
on  the  most  convenient  basis.  The  distinction  into  classes 
of  agricultural  commodities  has  been  made  as  follows: 
harvesting  machinery,  tillage  implements,  threshing  outfits, 
and  side  lines.  The  reason  for  this  is  largely  one  of  origin 
and  emphasis,  but  has  to  do  also  with  phases  of  demand. 
Another  classification  of  commodities,  along  the  lines  of 
principles  determining  the  location  of  retail  stores  and 
types  of  distributive  systems,  is:  emergency  goods,  con- 
venience goods,  and  shopping  lines.  Groceries  have  been 
divided  into  staples,  fancies,  and  specialties.  Automobiles 
are  classified  (1)  on  the  basis  of  motive  power  into  gasoline, 
steam,  and  electric;  (2)  on  the  basis  of  price  as  (a)  $5,000 
and  over,  or  high-grade  car,  (&)  the  $2,000,  or  medium 
grade  car,  (c)  the  $1,000  car  and  {d)  the  Ford.  Every 
step  toward  classification  is,  however,  a  step  toward 
analysis.  The  more  carefully  it  is  done,  the  more  thor- 
oughly it  is  done,  the  more  intelligent  will  be  the  business 
methods. 

183.  Analysis  and  Grading. — It  is  to  be  noted  in  this 
connection  that  the  process  of  commodity  analysis  is  a 
process  of  establishing  standard  grades.  For  grades  to 
be  scientifically  determined,  they  must  be  founded  upon 
the  want-satisfying  qualities  or  the  utility  of  the  goods. 


ANALYSIS  OF  THE  COMMODITY  293 

Classification  and  grading  must  be  for  a  purpose.  In 
merchandising,  the  purpose  is  most  effectively  to  match 
commodities  against  wants.  Therefore,  just  as  raw  ma- 
terials are  analyzed  to  construct  from  them  a  predesigned 
product,  so  finished  goods  are  analyzed  to  isolate  and 
identify  their  utilities.  The  basis  of  all  scientific  grading 
is  value  in  the  economic  sense.  For  example,  oranges  have 
been  analyzed  for  their  relative  food  value,  that  is,  the 
amount  of  calories  which  they  contain  as  compared  with 
oysters,  buttermilk,  and  so  forth,7  their  use  as  a  food  in 
fever  cases,  as  a  substitute  for  water,  and  the  "vitamines" 
which  they  contain;  cloth  is  tested  for  shrinkage;  type- 
writers for  durability,  speed,  adaptability,  convenience, 
ease  of  operation,  ease  and  cheapness  of  keeping  in  repair; 
an  automobile  as  to  service  or  style. 

184.  Analysis  and  the  Market. — Goods  are  made  and 
goods  are  handled  to  satisfy  human  wants.  The  sum  total 
of  human  wants  is  the  possible  market  for  products.  Into 
every  consideration  of  every  commodity,  therefore,  enters 
the  element  of  demand.  In  fact,  goods  cannot  be  analyzed 
apart  from  the  market.  There  is,  therefore,  a  vital  inter- 
relation between  the  market  and  the  product.  It  is  not 
logical  to  attempt  to  analyze  a  commodity  simply  as  a 
thing  in  itself,  because  it  is  desirable  only  in  so  far  as 
it  is  useful. 

Suggestions  for  Study 

The  student  should  continue  his  study  of  a  specific  com- 
modity in  connection  with  the  problems  of  this  chapter. 
It  would  be  wise  to  select  a  finished  product  into  which 
the  raw  material  of  the  preceding  section  has  entered.  The 
following  points  will  serve  as  topics  for  classroom  dis- 
cussion : 

'Bulletin  No.  28,  U.  S.  Department  of  Agriculture. 


294  MARKETING 

1.  The  educational  value  of  analysis. 

2.  The  style  element  as  a  commercial  factor. 

3.  Sources  of  data  for  a  stock  plan. 

4.  Qualifications  of  a  purchasing  agent. 

5.  Analysis  and  turnover  of  stock. 

6.  Bargain  sales  and  commodity  analysis. 

7.  Natural  sciences  and  commodity  analysis. 

8.  Utility  analysis. 

9.  Evaluating  qualities  in  terms  of  price. 
10.  "Humanizing"  commodities. 

Readings  : 

MacMartin,  "Planning  an  Advertising  Campaign  for  a  Manu- 
facturer," Part  I. 
Shaw,  Approach  to  Business  Problems,  Chap.  X. 
Ivey,  Essentials  of  Retail  Salesmanship,  Chaps.  Ill,  IV. 
Field,  Retail  Buying,  Chaps.  IV,  VI. 
Nystrom,  Economics  of  Retailing,  Chap.  XVII. 

Retail  Store  Management,  Chaps.  Ill,  V. 

Terry,  How  to  Keep  a  Store,  Chap.  IV. 


CHAPTER  XIV 

ANALYZING   THE   MARKET 

185.  Some  Aspects  of  Market  Analysis. — The  market  in 
its  broadest  sense,  we  have  said,  means  demand,  or  in 
economic  phraseology,  effective  demand — a  demand  with 
the  compelling  force  of  purchasing  power  behind  it.  In 
this  sense  the  term  is  used  here,  because  it  holds  equally 
true  for  finished  goods.  A  market  is  a  chance  to  buy  or 
sell.  The  merchant  is  ever  on  the  lookout  for  a  chance 
to  buy  or  to  sell,  at  a  profit  to  himself.  His  great  problem 
is  demand  creation ;  he  must  seek  out  his  own  market  in  the 
midst  of  keen  competition.  As  has  been  pointed  out,  the 
merchant  must  buy  with  skill  and  judgment,  but  this  skill 
and  judgment  will  be  derived  largely  from  a  thorough 
knowledge  of  the  market.  In  these  modern  days  it  is 
necessary  for  the  merchant  to  study  his  market  in  advance. 

What  this  market  is  in  broad  outlines,  what  factors 
enter  into  it,  what  changes  occur,  what  development  there 
has  been,  how  to  estimate  it — in  a  word,  how  to  study  it 
in  advance — is  the  problem  of  this  chapter.  An  attempt 
will  be  made  to  outline  the  principles  by  means  of  which 
the  market  may  be  analyzed.  Much  will  depend  upon  the 
point  of  view  from  which  the  problem  is  approached.  In 
general  terms  a  market  may  be  analyzed  on  the  basis  of 

(1)  the  character  of  the  commodity,  (2)  the  grades  of  com- 
modities, (3)  prices  of  commodities;  or  from  the  reverse 
angle,  on  the  basis  of  (1)  the  character  of  the  population, 

(2)  the  number  of  people  in  the  market  area,  (3)  the  pur- 
chasing  power  and   its  distribution,    (4)    buying  habits, 

295 


296  MARKETING 

(5)  standards  of  living,  (6)  occupations,  and  (7)  climatic 
conditions.  In  one  case,  the  line  of  vision  is  from  the 
individual  toward  the  commodity;  in  the  other  case,  it  is 
from  the  commodity  toward  the  individual. 

186.  Trade  Geography. — Politically,  men  think  in  terms 
of  certain  clearly  defined  divisions,  whether  federal,  state, 
or  local.  Tariff  walls  attempt  to  apply  political  delimita- 
tions to  markets.  The  United  States  Census  is  founded 
on  political  units,  for  industry  and  commerce  as  well  as 
for  ethnology  and  agriculture.  So  common  is  the  custom 
of  using  political  units,  that  the  idea  tends  to  be  accepted 
that  these  are  natural  divisions  of  the  country.  As  a 
matter  of  fact  they  are  not  natural  divisions  from  any 
point  of  view,  and  especially  is  this  true  of  trade.  Market 
boundaries  do  not  follow  state  or  local  political  boundaries 
at  all.  They  do  not  coincide  with  the  larger  divisions  made 
by  the  Interstate  Commerce  Commission  for  the  classifica- 
tion of  freight.  In  other  words,  commercial  sections  are 
not  politically  or  physically  distinct  sections.  Market  areas 
overlap  almost  promiscuously.  A  geography  of  the  United 
States  made  on  the  basis  of  retail-market  conditions  would 
be  a  striking  one. 

If  one  will  look  at  the  country  from  the  point  of  view  of 
trade,  he  will  find  three  fairly  distinct  divisions.  One  is 
the  city  market,  another  is  the  suburban  market,  and  a 
third  is  the  country  market.  It  is  not  possible,  of  course, 
to  make  a  clear-cut  division,  but  the  distinction  will  serve 
as  a  practical  one.  There  are  many  rapid  changes  occur- 
ring to-day  which  tend  to  make  the  lines  of  division  more 
shadowy,  such  as  good  roads,  automobiles,  and  a  redistribu- 
tion of  purchasing  power. 

The  city  trade  will  fall  into  two  general  classes. 
One  of  these  may  be  called  the  metropolitan  market;  the 
other,  the  general  city  market.  The  metropolitan  market 
may  be  outlined  by  drawing  a  line  from  Portland,  Maine, 


ANALYZING  THE  MARKET  297 

so  as  to  include  Massachusetts,  Connecticut,  and  part  of 
New  York  and  Pennsylvania,  ending  somewhere  below 
Wilmington,  Delaware.  This  is  the  greatest  retail  section 
of  the  United  States.  It  contains  three  of  the  largest  and 
wealthiest  cities,  New  York,  Philadelphia,  and  Boston.  It 
marks  off  also  the  region  of  concentrated  manufacturing 
and  of  wealth.  The  dominating  factors  emanate  from  the 
three  great  centers  named. 

The  general  city  trade  is  made  up  of  the  trading  centers 
throughout  the  United  States  ranging  from  60,000  or 
75,000  inhabitants  up  to  one  million  or  more.  These  centers 
in  all  parts  of  the  country  outside  of  the  metropolitan 
region  have  certain  characteristics  in  common.  The  sub- 
urban market  consists  of  smaller  towns,  which  are  satellites 
to  the  larger  ones.  Cities  of  75,000  or  below  may  be  called 
suburban.  The  country  trade  is  made  up  of  the  rural 
districts  proper  and  small  towns  having  up  to  2,500  in- 
habitants. 

In  the  trade  geography  for  textiles,  for  example,  the 
important  point  to  keep  in  mind  is  that  these  goods  fall 
into  three  classes.  There  are  the  shopping  lines,  the 
emergency-goods  lines,  and  the  convenience-goods  lines. 
The  metropolitan  market  is  the  great  shopping  center.  For 
this  reason  the  textile  buyers  have  flocked  to  the  Eastern 
trade  centers  to  do  their  buying,  because  they  found  there 
the  best  shopping  opportunities.  These  shopping  oppor- 
tunities depend,  of  course,  upon  the  fact  that  it  is  possible 
to  compare  so  many  different  lines.  The  metropolitan 
market  reaches  out  to  dominate  the  shopping  trade.  This 
creates  a  problem  for  the  general  city  and  the  suburban 
market,  where  the  dealers  must  struggle  for  a  share  of  the 
shopping  trade.  The  main  bulk  of  their  sales,  however, 
will  be  in  emergency  and  convenience  goods.  The  country 
store  will  struggle  in  its  turn  with  the  larger  trade  center 
for  a  meager  share  of  the  shopping  trade,  but  will  depend 


298  MARKETING 

in  its  turn  also  in  the  main  upon  emergency  and  con- 
venience goods. 

Geographical  divisions  will  have  to  be  varied  for  other 
commodities  than  textiles,  but  in  general  these  are  basic 
in  the  finished-goods  trade.  St.  Louis  is  a  dominating 
figure  in  shelf  hardware,  with  Chicago  a  close  second.  The 
latter  towers  up  in  canned  goods  and  railway  supplies. 
Minneapolis  is  important  in  the  flour  trade.  The  point 
is  that  a  great  trade  center  tends  to  control  the  lines  of 
trade.  Boston  practically  dominates  the  New  England 
market  and  typifies  the  Yankee  buying  habits.  The  region 
dominated  by  New  York  City  is  the  great  spending  center 
of  the  country.  There  may  be  found  the  most  expensive 
displays  in  the  United  States.  The  New  York  market  runs 
on  the  basis  of  style  with  price  a  subordinate  factor,  as 
contrasted  with  the  careful  Yankee  shopper.  The  out- 
standing attributes  of  the  Middle  West  are  frugality, 
stability,  and  conservatism,  applying  both  to  styles  and 
prices,  and  emphasizing  utility.  Thus,  Chicago  sells  an 
enormous  volume  of  staples  and  is,  without  doubt,  the 
greatest  jobbing  center  for  general  merchandise,  as  well 
as  for  textiles.  It  is  significant,  too,  that  Chicago  has  the 
largest  retail  stores  in  the  country  and  the  greatest  mail- 
order houses  in  the  world. 

The  geographical  lines  of  trade  are  shifting  and 
irregular,  because  the  elements  upon  which  they  are 
founded  are  so.  Among  these  elements  the  following  are 
to  be  considered;  means  of  travel,  nationality,  purchasing 
power,  buying  habits,  and  many  psychological  influences. 
It  is  very  much  worth  while,  however,  to  ascertain  as 
definitely  as  possible  these  regions. 

187.  Historical  Considerations. — To  get  a  proper  per- 
spective of  market  conditions,  it  is  necessary  to  trace  their 
development.  The  development  of  demand  is  economic 
progress.     In  order  to  understand  present  conditions  and 


ANALYZING  THE  MARKET  299 

to  determine  future  tendencies  one  should  make  an  his- 
torical survey  of  the  market.  There  is  a  mine  of  valuable 
information,  for  example,  in  the  mail-order  catalogs  put 
out  by  the  leading  houses.  It  would  be  possible  to  write 
the  history  of  trade  in  many  lines  of  merchandise  by  a 
study  of  those  catalogs,  running  back  to  1874.  What  new 
kinds  of  goods  have  appeared,  how  they  have  held  up, 
how  they  have  changed,  why  certain  ones  have  disappeared, 
why  they  have  reappeared,  and  how  the  quality  has  been 
toned  up,  could  be  learned  by  such  an  investigation.  At 
the  same  time,  one  would  become  versed  in  market 
psychology. 

What  could  be  done  in  this  way  for  the  country  market 
could  be  done  for  other  markets  by  other  means.  Adver- 
tisements in  newspapers,  in  magazines,  on  billboards,  and 
elsewhere  can  be  studied  progressively.  An  individual 
business  affords  the  opportunity  for  the  same  kind  of 
study.  What  the  market  has  taken  and  what  the  market 
has  refused  to  take  are  both  of  significance. 

Progress  in  demand  can  be  made  in  two  general  ways. 
One  is  by  the  development  of  new  wants;  the  other  by  an 
intensifying,  or  elaboration,  of  existing  wants.  There  was 
first  a  demand  for  a  horseless  carriage,  and  the  driver  of 
it  was  willing  to  endure  the  jiggling  and  jolting,  the  noise 
of  the  engine,  and  the  difficulty  of  starting  it.  From  this 
crude  beginning  there  has  developed  the  luxurious  car  of 
to-day  with  all  of  its  conveniences  and  accessories.  This 
example  is  typical  of  market  progress;  first  a  demand, 
however  stimulated,  then  a  gradual  refinement  of  it.  The 
telephone  was  in  the  beginning  a  luxury  even  in  business, 
but  to-day  is  a  necessity  in  business  and  in  most  homes. 
Besides,  there  have  developed  numerous  conveniences  to 
facilitate  the  use  of  it. 

Other  important  facts  will  be  learned  from  a  study  of 
market  development.     There  are  the  changes  in  taste,  in 


300  MARKETING 

the  level  of  the  standard  of  living.  There  is  the  long 
groundswell  of  market  fluctuation  to  be  compared  and 
contrasted  with  the  short,  choppy  ones.  Furthermore, 
markets  never  stand  still;  they  are  dynamic,  not  static. 
It  is  of  great  importance,  therefore,  to  determine  as 
accurately  as  possible  how  the  markets  are  moving,  whether 
toward  an  increase  or  toward  a  decrease,  and  why.  The 
same  kinds  of  advantages  accrue  from  an  historical  knowl- 
edge of  the  market  as  from  an  historical  knowledge  of  the 
political  situation.  If  one  can  know  where  we  are  and 
whither  we  are  tending,  one  can  better  know  what  to  do 
and  how  to  do  it,  in  trade  as  well  as  in  politics.  Merchants 
will  do  themselves  a  great  service  by  keeping  records  in 
such  a  way  as  to  make  possible  a  survey  of  business  develop- 
ment. 

188.  Market  Units. — Ultimately,  the  unit  reached  in 
market  analysis  is  the  individual.  He  is  the  consumer. 
Of  his  importance  one  business  investigator  has  written: 
' '  The  manufacturer  should  never  lose  sight  of  the  fact  that 
over  all  this  army  of  middlemen,  the  consumer  is  king. 
What  he  demands,  they  buy — what  he  refuses,  they  reject ; 
and  King  Consumer  demands  and  refuses  on  the  basis 
of  quality.  His  whim  makes  and  unmakes  manufacturer, 
jobber,  and  retailer.  Whoever  wins  his  confidence  has 
won  the  market;  whoever  loses  it  is  lost."1 

Of  these  individual  consumers  there  are  in  the  United 
States  about  105,000,000.  This  is  a  vast  market  to  which 
to  appeal.  But  the  rewards  of  successful  appeal  are  so 
tremendous  as  to  stimulate  repeated  attempts.  The  in- 
dividual market  itself  is  constantly  shifting  and  changing. 
To  know  it  thoroughly  is  to  know  these  millions  of  in- 
dividualities. This  problem  has  too  many  variables  for 
solution.  There  are,  in  fact,  other  ways  to  approach  it 
than  through  the  individual  unit. 
1  Address  by  C.  C.  Parlin. 


ANALYZING  THE  MARKET  301 

The  most  common  buying  unit  in  the  market  is  the 
family.  This  offers  a  composite  demand  through  a  single 
buying  medium,  usually  the  woman  in  the  household  as  a 
purchasing  agent.  It  has  been  estimated  that  women  make 
about  75  per  cent  of  the  household  purchases.  A  large 
part,  therefore,  of  the  appeals  to  consumers  can  be  made 
to  them.  Sex  becomes  a  prominent  consideration  in  market 
analysis. 

The  market  unit,  however,  will  be  influenced  by  several 
considerations.  There  is,  first,  the  kind  of  commodity. 
No  one  would  think  of  planning  a  sales  campaign  for  steam 
excavators  on  the  family  unit  basis,  or  cash  registers,  or 
comptometers.  In  this  connection,  it  is  necessary  to  dis- 
tinguish between  those  goods  which  minister  directly  to 
human  wants,  usually  known  as  consumers'  goods,  and 
those  used  to  produce  them,  or  producers'  goods.  The 
latter  will  run  on  a  different  market  unit  than  the  former. 
In  fact,  the  individual  and  the  family  units  are  usually 
applied  to  consumers'  goods.  Producers'  goods  may  be 
based  upon  an  individual  establishment,  an  industry,  or  a 
community.  A  railway  terminal,  a  road,  a  public  building, 
are  judged  on  a  broad  community  unit. 

The  character  of  population  will  also  influence  the  mar- 
ket unit.  There  are  individualistic  qualities  and  clannish 
qualities ;  there  are  religious  regulations  and  social  require- 
ments; there  are  purchasing  power,  prices,  and  grades  of 
commodities  also  to  be  considered;  there  are  occupations 
and  ages  as  factors.  The  analysis,  even  from  this  point 
of  view,  is  never  complete. 

189.  Social  Elements  in  the  Market. — Whatever  the  com- 
modity and  whatever  the  unit  considered,  a  prime  factor 
in  understanding  the  market  is  to  know  the  fundamental 
social  elements.  In  general,  the  social  study  of  mankind 
divides  itself  into  two  parts;  one  has  to  do  with  physical 
phenomena,  the  other  with  mental.     Bodily  form  and  ac- 


302  MARKETING 

tivities  are  physical  in  character  and  offer  an  opportunity 
to  study  society  from  the  point  of  view  of  physical  energy. 
The  physical  facts  to  be  considered  in  this  respect  are: 
(1)  birth  rates,  (2)  migration,  (3)  groupings,  (4)  employ- 
ment, and  (5)  sex.  Back  of  these  there  are  some  elementary 
physical  laws  which  may  be  stated  broadly  as  follows: 
(a)  there  is  a  balance,  or  equilbrium,  of  forces  between  a 
population  and  its  environment,  i.e.,  "all  energy  expended 
in  the  growth  and  activity  of  a  population  is  derived  from 
the  physical  world,"  thus  determining  the  virility  and 
density  of  population;  (b)  as  a  corollary  it  follows  that, 
given  a  population,  and  other  things  being  equal,  "social 
activity  varies  with  the  harvests,"  showing  a  correlation 
between  good  or  bad  times  and  the  marriage,  birth,  and 
death  rate;  (c)  social  activity  follows  the  line  of  least 
resistance,  in  migrating,  in  concentrating,  in  determining 
occupations. 

Of  the  mental  phenomena,  the  most  important  are  the 
group  characteristics.  Fundamental  here  is  the  "law  of 
least  effort."  It  is  a  human  desire  to  attain  satisfaction 
with  a  minimum  of  difficulty.  There  is  an  interest  and 
a  pleasure  in  finding  a  likeness  between  oneself  and  others. 
A  further  characteristic  is  a  response  or  lack  of  response 
to  the  same  stimuli;  the  former  is  sympathy,  the  latter 
antipathy  or  prejudice.  In  any  group,  also,  there  is  a 
desire  for  a  diversity  of  satisfaction,  always  extending  in 
one  way  or  another  the  marginal  utility. 

In  the  market,  as  in  other  phases  of  social  activity,  there 
are  leaders.  Strong  personality,  superior  mental  vigor, 
aggressiveness,  are  important  in  determining  the  direction 
of  demand.  There  are  leaders  in  every  market  for  every 
'kind  of  commodity;  there  are  leaders  in  buying  thought 
just  as  there  are  leaders  in  political  and  religious  thought. 
The  merchant,  and  especially  the  retail  merchant,  should 
try  to  identify  and  appeal  to  these  leaders  in  the  market. 


ANALYZING  THE  MARKET  303 

If  the  consumer  is  king,  these  leaders  are  kings  of  kings. 
If  the  consumer  thinks  for  the  retailer,  these  leaders  think 
for  the  mass  of  consumers. 

Leadership  in  demand  depends  largely  upon  the  power- 
ful force  of  imitation.  People  imitate  those  whom  they 
admire  or  respect.  Those  who  are  admired  may  be  neigh- 
bors or  strangers;  natives  or  foreigners;  real  persons  or 
fictitious  characters.  Every  ' '  best  seller, ' '  through  illustra- 
tions and  descriptions,  has  a  market  influence.  Actors  and 
actresses  exert  a  powerful  influence.  The  power  of  movie 
stars  in  this  respect  is  very  well  recognized.  Certain 
illustrators  have  developed  types,  both  of  men  and  women, 
that  receive  wide  imitation. 

Through  the  power  of  leadership  and  by  imitation,  in 
general,  buying  habits  are  developed.  There  come  to  be 
within  the  broader  market  certain  commodity  areas.  In 
certain  districts  the  farmers  will  use  only  a  left-handed 
plow ;  in  others  a  right-handed  plow  is  preferred.  In  some 
sections  a  wide-tired  wagon  is  most  popular ;  in  others,  and 
without  justifiable  reasons,  a  narrow  tire.  In  Boston,  for 
example,  a  most  familiar  sight  is  a  peculiarly  shaped 
double-handled  handbag.  This  bag  has  made  inroads  into 
the  field  preempted  in  old  times  by  the  Harvard  green 
bag.  There  are,  also,  corn-bread  areas  and  sauerkraut 
areas.  Wherever  there  is  stability  in  a  community  these 
buying  habits  tend  to  develop.  In  some  parts  of  the  coun- 
try to-day,  however,  the  consumers'  map  represents  an 
intricate  and  shifting  problem.  Because  the  market  is 
made  up  of  people,  individuals  and  groups,  the  problem 
of  analysis  is  permeated  by  social  considerations.  Mass 
psychology  becomes  important  for  the  merchant  in 
analyzing  his  market. 

190.  Population  Movements. — A  market  is  made  up  of 
people,  and  therefore  changes  as  the  people  change.  A 
new  generation  may  mark  a  radical  departure  in  buying 


304  MARKETING 

habits.  But  in  a  comparatively  new  and  rapidly  develop- 
ing country  it  is  even  more  important  to  trace  the  ebb  and 
flow  of  people.  Certain  districts  in  Chicago  were  greatly 
changed  within  a  single  year  by  the  influx  of  more  than 
10,000  negroes  from  the  South.  Within  the  lifetime  of 
a  single  individual  a  New  England  town  has  changed  its 
racial  characteristics  three  or  four  times.  The  older  type 
of  New  Englander  gave  place  to  the  Irish  immigrant;  the 
Irishman,  in  his  turn,  yielded  to  the  French-Canadian,  who 
was  supplanted  by  the  Italian.  Since  the  coming  of  Italians 
there  has  been  a  dilution  from  half  a  dozen  different 
sources.    The  market  has  been  kaleidoscopic. 

The  census  reports  have  shown,  from  period  to  period, 
the  results  of  population  movements.  The  one  now  being 
taken  will  likewise  reveal  some  interesting  facts.  "Whole- 
saler and  retailer  should  watch  for  them.  Racial  char- 
acteristics are  clearly  marked  in  buying  habits.  In  a  cer- 
tain town  in  Missouri  one  part  is  occupied  by  people  who 
came  from  Ohio,  Illinois,  and  Indiana;  the  other  part  is 
occupied  by  Southerners.  An  open  city  market  was  suc- 
cessful in  the  former  section,  but  a  failure  in  the  latter. 

191.  Population  Analysis. — The  same  plan  of  popula- 
tion analysis  may  be  applied  generally.  Some  of  the  most 
important  considerations  are : 

1.  Age  Distribution. — Usually  the  parents  decide  upon 
purchases,  but  in  the  United  States  a  growing  influence  of. 
children  is  noted.  This  has  led  to  an  appeal  to  the  children 
in  an  attempt,  through  them,  to  direct  purchasing  power. 

2.  Sex. — Not  only  is  the  demand  different  for  different 
sexes,  but  also  the  method  of  appeal  must  differ.  In 
general,  women  are  more  careful  buyers  than  men.  Some 
psychological  tests  were  recently  made  with  the  following 
deductions:  (a)  women  buy  men's  goods  eleven  times  as 
much  as  men  buy  women's  goods;  (b)  women  help  men 
buy  twice  as  much  as  men  help  women  buy;  (c)  men  only 


ANALYZING  THE  MARKET  305 

help  to  buy  advertised  goods;  (d)  women  alone  purchase 
48.4  per  cent,  of  all  goods;  adding  what  both  buy  together 
equals  59.9  per  cent.;  (e)  women  respond  more  quickly  to 
appeals  to  their  dislikes,  men  to  appeals  to  preferences; 
(/)  the  problem  with  men  is  to  get  attention,  with  women, 
to  hold  it;  (g)  women  invariably  respond  more  quickly  to 
an  eye  appeal  (pictures)  than  men,  who  usually  prefer 
reading  matter;  (h)  women  are  less  apt  to  take  up  with 
something  new;  (i)  women  respond  most  quickly  to  per- 
sonal appeals,  men  to  appeals  of  a  social  sort.  These 
psychological  guesses  indicate  the  significance  of  sex  in 
population  analysis. 

3.  Habits. — These  may  be  social,  racial,  or  personal, 
but  in  so  far  as  they  affect  method  and  quantity  of  buying 
they  are  important  for  market  analysis. 

4.  Occupations. — The  same  kind  of  work  makes  a  bond 
between  men.  Printers,  carpenters,  miners,  and  so  on,  have 
some  things  in  common,  however  much  they  may  differ  in 
certain  qualities. 

5.  Living  Conditions. — Men  of  certain  ranges  of  pur- 
chasing power  tend  to  adopt  similar  standards  of  living, 
but,  of  course,  the  city  dweller  of  the  same  economic  status 
will  have  different  demands  from  the  suburban  or  country 
man.  A  recent  survey  of  families  with  incomes  ranging 
from  $2,000  to  $5,000  per  year  showed  that  72  per  cent 
lived  in  apartments  and  60  per  cent  had  neither  vehicles 
nor  musical  instruments.  Another  survey  used  the  amount 
of  rent  paid  as  a  criterion  of  economic  status.  Some  groups, 
for  example,  in  university  neighborhoods,  have  tastes  de- 
veloped regardless  of  economic  status. 

6.  Purchasing  Power. — Men  cannot  buy  without  pur- 
chasing power.  It  would  be  useless  to  try  to  market  high- 
priced  limousines  in  the  hill  counties  of  Arkansas.  A  de- 
mand might  be  found  but  it  would  not  be  an  effective 
demand. 


30G  MARKETING 

7.  Climatic  Considerations. — Obviously,  wants  are  modi- 
fied by  climatic  conditions.  Economic  progress  is  led  and 
directed  from  the  temperate  zone.  Apart  from  the  physical 
and  mental  stimulus  of  a  vigorous  climate,  there  is  the  very 
practical  consideration  of  food,  shelter,  and  clothing. 
Within  our  own  country,  also,  there  are  significant  dif- 
ferences. The  population  on  the  plains  is  one  problem; 
dwellers  among  the  hills  and  mountains  are  another. 
Climate  among  many  other  things  distinguishes  the  South 
from  the  North,  the  East  from  the  West,  New  England 
from  California,  Texas  from  Minnesota. 

8.  Social  Strata. — Society  tends  to  divide  itself  into 
strata  along  several  different  lines :  one  is  wealth ;  another 
is  education;  a  third,  racial;  a  fourth,  religious;  a  fifth, 
ancestral.    All  of  these  things  affect  the  marketing  problem. 

192.  Incomes. — In  connection  with  the  question  of  pur- 
chasing power  within  the  market  comes  another  having  to 
do  with  the  distribution  of  it.  How  much  expenditure  can 
there  be  per  unit,  whether  the  unit  is  the  individual,  the 
family,  or  the  community  ?  It  was  estimated  from  the  last 
census  data  that  27  per  cent  of  the  total  aggregate  income 
in  the  United  States  goes  to  the  poorer  half  of  the  families 
and  73  per  cent  to  the  richer  half ;  that  10  per  cent  of  the 
families  gets  from  three-fifths  to  two-thirds  of  the  total 
income.  Even  here  it  is  required  to  descend  to  those  receiv- 
ing between  $1,200  and  $1,800  to  make  up  the  10  per  cent. 
No  doubt  the  figures  are  to-day  much  changed.  This  re- 
distribution of  wealth  is  a  great  new  factor  in  market 
analysis. 

It  is  not  the  amount  of  money  that  the  income  represents, 
but  the  buying  power  of  that  money  that  counts  in  the 
market.  Just  as  there  is  a  real  and  a  nominal  wage,  so 
there  is  a  real  and  a  nominal  income.  An  income  has  its 
true  significance  in  relation  to  prices,  and  the  income  must 
be  judged  on  a  unit  basis — as  individual,  family,  or  com- 


ANALYZING  THE  MARKET  307 

munity.  No  one  has  an  "average"  income  to  spend.  It  is 
necessary  to  consider  the  distribution  of  incomes.  The 
market  responds  most  quickly  to  a  well  proportioned  range 
of  income;  not  necessarily  an  equal,  but  a  widespread, 
generous  income. 

193.  Budgets. — Typical,  representative,  or  average  budg- 
ets have  often  been  constructed  to  show  how  the  income 
is  spent.  This  has  been  done  both  for  the  individual,  that 
is,  for  the  single  man  and  the  single  woman,  and  for  the 
typical  American  family  consisting  of  the  two  parents  and 
three  children.  The  items  have  been  calculated  both  abso- 
lutely and  by  percentages.  A  table  giving  the  percentages 
of  expenditures  for  various  purposes  is  shown  for  1914. 

Item  Per  Cent  of  Total  Income 

Food 43% 

Shelter 18% 

Clothing 13% 

Fuel,  heat,  light 6% 

Sundries 20% 

This  specimen  budget,  obtained  by  the  Bureau  of  Labor 
Statistics,  is  constructed  from  a  broad  survey.  Although 
it  may  not  fit  precisely  the  expenditures  of  any  one  family, 
the  general  tendency  is  to  approximate  this.  The  local 
conditions  behind  any  average  budget  should  always  be 
carefully  considered.  In  one  case  rents  will  be  high;  in 
another,  food,  and  so  on. 

It  is  essential  to  note  in  this  connection  that  the  relative 
importance  of  the  budgetary  items  changes  with  changing 
prices.  A  given  budget  represents  average  conditions  at 
the  ruling  prices.  War  prices  made  chaos  of  the  prewar 
percentage  budget.  The  relative  importance  of  food  has 
increased ;  shelter  has  fallen  to  about  8  per  cent ;  clothing 
has  gone  up  to  nearly  20  per  cent ;  fuel,  heat,  and  light 
have  decreased  in  importance;  sundries  are  also  less  im- 
portant.   It  is  obvious  that  if  an  income  remains  fixed  and 


308 


MARKETING 


some  item  in  the  budget  rises,  there  must  be  a  correspond- 
ing decrease  elsewhere. 

A  budget,  with  estimated  absolute  amounts,  was  made 
by  the  Department  of  Labor,  to  represent  the  expenditure 
necessary  to  maintain  a  reasonable  standard  of  living.  As 
indicated,  this  budget  is  for  a  single  man  or  a  single 
woman. 

Summary  op  Annual  Budget 


Items 

Room  (2  in  room)  $15  per  month  per  person 
Board: 

Regular  table  board,  2  meals  on  week- 
days, 3  on  Sunday,  $6  per  week 

Lunch,  25  cents  per  day  for  313  days .... 

Other  food,  confectionery,  etc.,  25  cents 

per  week 

Clothing 

Laundry 

Toilet  supplies 

Health,  medicine,  dentist,  oculist 

Religious  organization 

Labor  organization 

Newspapers 

Books  and  magazines 

Carfare 

Amusements 

Vacations 

Educational  purposes 

Other  incidentals 

Savings  10% 


Man 


Woman 


3. 

4. 

5. 

6. 

7. 

8. 

9. 
10. 
11. 
12. 
13. 
14. 
15. 


16. 


$180.00 


312.00 
78.25 

13.00 

158.36 

52.00 

15.00 

32.00 

5.20 

5.00 

8.40 


37.20 
39.00 


26.00 


$180.00 


312.00 
78.25 

13.00 

240.15 

65.00 

10.00 

43.00 

5.20 

5.00 

8.40 

37.20 
20.00 


20.00 


$961.41 
96.14 


$1037.20 
103.72 


$1057.55 


$1140.92 


Such  budgets  are  at  least  a  vague  indication  of  the  drift 
of  expenditure.  It  adds  to  one's  knowledge  of  the 
market  to  learn,  in  addition  to  an  estimate  of  income, 
that  is,  the  total  amount  to  be  expended,  something  as  to 
the   relative  division   of  expenditure.     It  was  estimated 


ANALYZING  THE  MARKET  309 

several  years  ago  that  the  consumption  of  food  in  the 
United  States  amounted  to  six  and  a  half  billion  dollars. 
To-day  the  figure  is  much  larger,  because  of  a  more  widely- 
spread  purchasing  power,  and  because  food  prices  have 
risen  more  than  one  hundred  per  cent  over  that  period. 
The  estimated  amount  spent  for  clothing  in  the  United 
States  was  at  that  time  about  $2,178,400,000;  for  shoes, 
$520,000,000  per  year;  for  furniture,  about  the  same;  for 
books  and  paper,  about  $166,400,000.2 

194.  Individual  Items. — Many  different  calculations  have 
been  made  as  to  the  consumption  in  total  amounts  and  per 
capita  of  various  specific  commodities.  To  the  individual 
merchant  the  great  concern  is  the  actual  and  potential 
market  for  the  product  which  he  handles.  It  has  been 
said  that  the  consumption  of  sugar  is  about  85  pounds 
per  capita.  Furthermore,  it  is  claimed  that  country  peo- 
ple eat  more  sugar  than  city  people.  This  estimate  would 
make  the  total  consumption  in  the  United  States  about 
405,000,000  pounds  annually.  A  newspaper,  with  a  cir- 
culation of  357,689,  claimed  that  within  the  territory 
reached  by  it,  there  were  used  about  2,000,000  bottles  of 
ammonia  for  washing  and  cleansing  purposes  alone,  about 
178,000  carpet  sweepers,  about  1,430,000  brooms,  357,000 
mops,  9,942,000  packages  of  washing  powder,  about  89,000 
wringers  and  89,000  washing  machines,  together  with 
1,788,000  cakes  of  soap. 

Certain  clearly  defined  groups  have  certain  clearly  de- 
fined needs.  There  are  probably  600  libraries  that  have 
a  policy  of  buying  every  book  of  general  interest  that  is 
published.  This  is  typical  of  the  market  that  can  be 
"counted  on."  It  has  also  been  pointed  out  that  there 
are  approximately  25,000,000  public  school  children  under 
compulsory  gymnastic  training;  that  there  are  50,000,000 

2 National  Advertising,  the  Modern  Selling  Force,  p.  44. 


310  MARKETING 

boys  and  girls,  young  men  and  young  women,  between  the 
ages  of  5  and  24,  interested  in  outdoor  and  indoor  games. 
For  these  groups  and  for  this  interest  certain  articles  are 
needed. 

Every  commodity  has,  of  course,  its  own  market.  Some- 
times this  market  is  definitely  limited,  by  price,  by  the 
lasting  qualities  of  the  product,  by  the  fact  that  de- 
mand cannot  be  expended,  and  so  on.  Furniture  is  not 
bought  as  frequently  as  shoes  or  clothing;  an  expensive 
automobile  has  a  smaller  potential  market  than  a  low- 
priced  one ;  not  as  many  fur  coats  as  neckties  can  be  sold 
to  an  individual.  There  are  numberless  influences  in  the 
market  that  need  watching  for  their  effect  upon  the  demand 
for  individual  commodities.  A  wet  summer  will  call  for 
more  lawn-mowers ;  a  dry  summer  for  more  feet  of  rubber 
hose.  "Steel  traps  for  catching  fur-bearings  animals  sell 
best  when  the  price  of  skins  is  high."  The  announcement 
that  flies  carry  disease  germs  boosted  the  market  for  "fly 
killers."  The  change  in  fashion  from  carpets  to  rugs  cut 
down  the  market  for  carpet  stretchers  and  tacks.  The  list 
of  illustrations  is  interminable. 

195.  Shifting  Demand. — Demand  may  change  from  a 
great  variety  of  causes.  It  may  be  due  to  the  caprice  or 
whim  of  a  fickle  public  taste.  This  applies  especially  to 
style  goods.  "Just  what  determines  the  selling  properties 
of  a  design  remains  a  mystery  to  the  wisest  dress-goods 
designer.  Two  designs  may  be  identical  except  for  some 
trifling  difference  in  structure.  One  may  be  a  good  seller, 
while  the  other  fails  to  move  at  all." 3 

The  change  may  come  with  no  well-defined  cause  behind 
it.  However  excellent  a  product  may  be,  there  may  be 
a  drift  from  it  to  a  newer  article.  The  American  public 
is  forever  seeking  some  new  thing.     It  has  been  said  that 

'  Cherington,  The  Wool  Industry,  p.  179. 


ANALYZING  THE  MARKET  311 

the  makers  of  breakfast  foods  found  a  shift  from  wheat  to 
corn,  which  continued  despite  advertising. 

In  the  regular  course  of  economic  progress,  there  may 
come  a  change  in  demand  for  certain  commodities.  Better 
grades  of  clothing  may  be  worn  by  a  new  generation.  There 
may  be  better  furniture,  better  houses;  high-priced  pianos 
may  displace  cheap  organs.  The  new  generation  may  find 
spending  money  "easy,"  and  live  in  general  on  a  higher 
standard. 

Demand  may  shift  suddenly  through  legislative  enact- 
ment. This  is  illustrated  by  the  Eighteenth  Amendment 
to  the  Federal  Constitution.  It  has  been  calculated  that 
as  much  as  $2,000,000,000  was  spent  annually  for  liquor  in 
the  United  States.  A  great  part  of  this  sum  has  now  been 
diverted  to  other  purchases.  Where  has  it  gone  ?  Increased 
purchases  are  reported  of  soft  drinks,  candy,  and  tobacco. 
Retailers  of  other  goods  say  that  they  have  noticed  that 
more  purchases  are  being  made  which  they  attribute  to 
money  saved  from  drink.  Savings  banks  report  increased 
deposits.  Somewhere  a  vast  sum  has  gone  into  purchases 
and  hundreds  of  thousands  of  family  budgets  have  been 
changed. 

196.  Form  and  Scope  of  a  Market. — The  scope  of  a 
market  may  be  judged  with  more  or  less  accuracy  on  a 
geographical  basis.  In  this  respect  it  will  be  modified  by 
the  character  of  the  commodity  itself.  A  wide  market 
requires  products  that  are  in  general  demand,  and  that 
are  small  in  bulk  and  light  in  weight  as  compared  with 
their  value.  These  products  must  also  be  durable.  All 
of  these  requirements,  however,  are  being  modified  by 
better  marketing  facilities.  Nevertheless,  under  strongly 
competitive  conditions,  the  location  of  producing  plants 
in  relation  to  the  market  will  always  be  an  important  con- 
sideration. 

The  form  of  the  market  will  be  modified  by  accidental 


312  MARKETING 

relations,  such  as  chance  acquaintance,  or  a  strong  adver- 
tisement coming  at  a  strategic  moment,  and  in  countless 
other  ways;  by  new  facilities,  such  as  railroads  or  steam- 
ship lines ;  by  natural  barriers,  such  as  mountains  or  bodies 
of  water;  by  artificial  barriers,  such  as  a  tariff,  hostility, 
prejudice.  As  a  rule,  trade  follows  the  line  of  least  re- 
sistance. Theoretically,  a  commercial  area  would  be  cir- 
cular in  shape,  with  the  productive  area  at  or  near  the 
center.  No  market  is  ever  actually  so.  The  commercial 
area  dominated  by  Chicago  is  modified  by  the  lakes  and 
the  Canadian  boundary.  It  has  been  extended  across  the 
broad  prairies  of  the  Northwest  and  the  West,  but  its  power 
has  been  broken  to  some  extent  by  the  rise  of  other  trade 
centers,  Milwaukee,  Minneapolis,  Kansas  City.  There  has 
been  a  long  struggle  with  St.  Louis  on  the  southwest.  Re- 
cently the  market  boundary  was  extended  toward  the  south- 
east when  a  new  opening  for  Chicago  products  was  made 
along  new  railway  lines  that  were  finally  able  to  break  a 
way  into  Chicago. 

197.  Financial  and  Trade  Conditions. — A  powerful  in- 
fluence on  market  demand  is  found  in  the  financial  and 
trade  conditions.  A  good  basic  crop  on  the  farms,  such 
as  corn,  wheat,  or  cotton,  makes  a  tremendous  difference 
in  purchasing  power.  The  large  mail-order  houses  have 
experts  in  the  field  for  the  purpose  of  keeping  in  touch 
with  crop  conditions,  so  important  do  they  consider  this 
information.  The  southern  market  has  been  revolutionized 
by  the  high  price  of  cotton. 

The  fundamental  importance  of  financial  conditions  was 
fully  demonstrated  in  the  panic  of  1907.  The  very  life- 
blood  of  trade  was  congealed.  What  a  chaotic  condition 
of  foreign  exchange  can  do  has  been  demonstrated  by  the 
experience  since  the  armistice.  When  money  becomes 
"tight,"  when  no  credits  are  extended,  the  purchasing 
power  of  the  market  is  prevented  from  activity;  demand 


ANALYZING  THE  MARKET  313 

is  only  potentially  effective.  It  may  be  noted,  however, 
that  a  panic  does  not  close  the  avenues  to  market.  A  corn 
syrup  was  launched  as  a  new  product  in  the  midst  of  a 
panic  and  achieved  "immediate  success  because  people 
welcomed  a  spread  for  bread  that  was  cheaper  than  butter 
and  jam."  4 

198.  The  Human  Element. — It  cannot  be  emphasized  too 
strongly  that  a  study  of  the  market  for  manufactured 
goods  is  a  study  of  people.  Retailer  and  wholesaler  and 
manufacturer  are  primarily  interested  in  people;  for  them 
the  consumer  is  an  "economic  man."  What  people  think 
economically,  how  they  are  pecuniarily  motivated,  how  they 
may  be  appealed  to,  what  their  defenses  are — these  things 
form  a  large  part  of  the  subject  matter  of  market  analysis. 

The  study  of  people,  even  as  mere  consumers,  is  an  in- 
finitely varying  and  a  perennially  interesting  one.  It 
offers  full  play  for  all  one's  faculties.  The  power  of  care- 
ful observation,  of  accurate  recording  of  impressions,  of 
discovering  motives  and  reactions,  of  imagination,  of  know- 
ing, in  brief,  the  human  mind  and  heart,  is  an  inestimable 
asset  in  market  analysis.  ' '  A  man  is  a  bundle  of  relations, 
a  knot  of  roots,  whose  flower  and  fruitage  is  the  world." 
The  market  is  as  interesting  and  as  complex  as  human 
nature. 

Suggestions  for  Study 

The  market  for  the  commodity  selected  for  study  should 
be  analyzed  at  this  point.  The  following  problems  will 
serve  for  class  discussion: 

1.  Take  the  definition  of  the  market  as  "a  chance  to  sell 
at  a  profit,"  and  try  to  formulate  some  guiding  prin- 
ciples for  investigation. 

*MacMartin,  "Planning  an  Advertising  Campaign  for  a  Manufac- 
turer," Part  II,  p.  68. 


314  MARKETING 

2.  Suppose  a  manufacturer  in  Chicago  asks  you  for  informa- 

tion on  the  market  possibilities  of  his  product,  say 
bicycles,  in  the  Piedmont  District  of  North  Carolina. 
How  would  you  begin? 

3.  Consumption  balanced  against  "square  mileage."    Discuss. 

4.  What,   in   your   judgment,   would   be   sound   criteria   for 

determining  (a)  standards  of  living,  (b)  purchasing 
power,  (c)  "likes  and  dislikes,"  in  any  given  market 
area? 

5.  Relate    the   whole    problem    of    market   analysis    to   the 

"guidance  of  economic  activity." 

6.  What  physical   condition  in  the  commercial   area  needs 

to  be  studied? 

7.  What  is  the  most  valuable  unit,  and  why,  upon  which  to 

base  a  population  analysis?  (a)  Social  group,  (b) 
Family,     (c)  Individual. 

8.  A  sales  manager  speaks  of  "factors  of  resistance"  in  a 

certain  territory.     What  can  he  mean? 

9.  Criticize  the  use  of  a  family  budget  as  a  basis  for  judg- 

ing market  demand. 
10.    "Consumer  is  King."    Discuss. 

Readings  : 

Shaw,  Some  Problems  in  Market  Distribution,  Chaps.  II,  IV; 
An  Approach  to  Business  Problems,  Chap.  XIV. 

Cherington,  Advertising  as  a  Business  Force,  Chaps.  I,  V. 

Fisk,  Retail  Selling,  Chaps.  I,  II. 

MacMartin,  "Planning  an  Advertising  Campaign  for  a  Manu- 
facturer," Part  II. 

Giddings,  Elements  of  Sociology,  Chap.  XII. 

Printers'  Ink,  September,  25,  1913,  p.  17;  July  31,  1913,  p.  17; 
December  31,  1914,  p.  74;  October  30,  1913,  p.  19;  March 
12,  1915,  p.  37. 

System,  February,  1913,  p.  115;  May,  1916,  p.  451. 


CHAPTER  XV 

THE  DISTRIBUTIVE  ORGANIZATION 

The  name  given  to  the  mechanism  for  distributing  goods, 
both  geographically  and  in  point  of  time,  as  they  are 
needed,  is  the  distributive  organization.  It  is  the  function 
of  this  organization  to  create  time  and  place  utilities,  and 
those  middlemen  who  are  engaged  in  such  activity  are 
presumably  rewarded  commensurate  with  the  service  thus 
performed. 

199.  Character  of  Distributive  Organization. — The  dis- 
tributive organization  of  to-day  is  not  of  sudden  growth, 
nor  has  it  yet  ceased  to  change  and  develop.  All  types 
of  business  organization  have  come  into  being  in  response 
to  an  economic  need;  they  tend  to  fall  into  decay  and  to 
disappear  when  the  need  is  gone.  They  live  and  thrive  by 
service.  With  the  widening  of  markets  and  the  specializa- 
tion of  functions,  the  distributive  organization  has  at  first 
grown  in  magnitude  and  in  complexity,  and  then  tended 
to  become  simpler  and  more  direct  under  the  influence 
of  standardization  and  identification  of  commodities,  and 
of  advertising. 

Parts  of  the  trade  organization,  however,  have  tended 
to  crystallize,  or  fossilize,  and  to  persist  after  their  use- 
fulness is  gone.  This  is  a  common  experience  with  in- 
dividuals and  groups.  The  old  dog  cannot  learn  new 
tricks.  Old  machinery  in  the  shop  is  retained  often  long 
after  it  has  ceased  to  be  efficient.  Old  methods  of  pro- 
duction have  continued  in  spite  of  new  inventions  and 
better  methods.     The  spinning  wheel,  the  hand  loom,  tha 

315 


316  MARKETING 

flail,  the  water  wheel,  have  not  wholly  vanished  from  the 
earth.  In  the  distribution  of  goods,  also,  old  methods  and 
outworn  processes  have  not  been  altogether  cleared  away. 
Caught  in  an  eddy  of  unprogressiveness,  they  have  escaped 
destruction.  Nevertheless,  it  is  true,  in  general,  that  in 
the  slow  processes  of  time  useless  parts  are  worn  away. 

The  distributive  organization  is  made  up  of  institutions 
and  functions.  "An  institution  consists  of  a  concept  (idea, 
notion,  doctrine,  interest)  and  a  structure.  The  structure 
is  a  framework  or  apparatus,  set  to  cooperate  in  pre- 
scribed ways  at  a  certain  conjuncture.  The  structure  holds 
the  concept  and  furnishes  instrumentalities  for  bringing 
it  into  the  world  of  facts  and  action  in  a  way  to  serve 
the  interests  of  men  in  society."1 

That  is,  there  are  certain  types  of  organization  or  cer- 
tain institutions  through  which  men  work  to  accomplish  a 
desired  end.  The  process  of  distributing  goods  is  the 
process  of  men  working  through  certain  mechanisms  and 
devices  which  they  have  developed  and  which  make  their 
work  most  effective.  The  purposes  in  view  are  the  func- 
tions. The  machinery  and  the  devices  are  the  institutions. 
Distribution,  like  production,  has  its  machinery. 

The  primary  purpose  of  the  distributive  organization 
is  obviously  to  carry  goods  from  the  manufacturer  to  the 
consumer.  In  order  to  do  this  task  effectively,  there  is 
needed  a  thorough  knowledge  of  the  commodity  itself,  and 
of  its  market.  This  means  that  market  information  is 
essential  for  the  effective  direction  and  for  the  economic 
adjustment  of  supply  and  demand.  It  is  the  duty  of  the 
middlemen  who  work  through  the  distributive  organization 
to  satisfy  established  wants  and  to  develop  new  wants. 
It  is  also  their  duty  to  distribute  goods  both  geographically 
and  in  point  of  time  as  they  are  needed. 

1  Sumner,  Folkways,  p.  53. 


THE  DISTRIBUTIVE  ORGANIZATION  317 

It  is  this  distributive  machinery,  constructed  for  these 
purposes,  that  is  to  be  analyzed  in  this  discussion.  How 
it  has  developed,  the  character  and  function  of  its  various 
parts,  its  operation  to-day,  and  the  tendencies  toward 
modification  for  future  services  will  be  discussed.  The 
trade  organization  for  handling  raw  materials  and  food- 
stuffs was  analyzed  from  the  point  of  view  of  definite 
functions.  The  distributive  organization  designed  to 
handle  manufactured  goods  will  be  examined  from  a  new 
angle.  In  the  case  of  raw  materials  and  foodstuffs,  atten- 
tion was  centered  on  the  control  of  commodities  and  the 
risks  undertaken.  In  the  case  of  manufactured  goods, 
emphasis  will  be  upon  the  attempt  by  producer,  whole- 
saler, and  retailer  to  control  and  direct  the  consumer  de- 
mand for  his  own  benefit. 

200.  Development  of  Distributive  Organization. — Com- 
mercially and  industrially,  as  well  as  politically,  the  begin- 
nings on  this  continent  were  British  in  character.  The 
manufacture  of  goods  by  the  colonists  was  forbidden  by 
law,  and  the  importation  from  non-British  sources  was 
restricted.  The  distributive  problem,  therefore,  as  con- 
nected with  manufactured  goods,  was  very  largely  one  for 
the  importer.  British  goods  were  brought  to  the  ports 
along  the  Atlantic  seaboard,  entered  in  the  storehouses 
there,  and  were  carried  thence  to  the  colonists  up  and 
down  the  coast  and  along  the  river  courses.  The  sea  and 
the  rivers  offered  at  first  the  only  open  highways  of  traffic ; 
inland  was  the  trackless  wilderness. 

It  was  necessary  for  the  early  settlers  to  adjust  them- 
selves to  a  pioneer  environment;  they  were  forced  to  pro- 
vide food,  shelter,  and  clothing.  The  need  of  tools  and 
household  utensils  was  imperative.  Household  manufac- 
ture, therefore,  could  not  be  wholly  suppressed.  It  was  not 
a  primitive  people  who  settled  this  country,  but  men  and 
women  skilled  in  the  arts  and  crafts  of  that  day,  and 


318  MARKETINq 

with  a  background  of  knowledge  and  experience  with  an 
advanced  civilization.  They  were  familiar  with  household 
manufacturing,  with  roads,  canals,  conveyances,  ships, 
banks,  money,  wholesaling,  and  retailing. 

Marketing  methods,  therefore,  in  this  country  were 
transplanted  from  Europe,  and  were  adjusted  to  the 
pioneer  conditions,  although  largely  controlled  by  restric- 
tive laws.  With  the  rise  of  a  spirit  of  independence,  do- 
mestic manufacturing  quickened.  Iron  ore  was  secured 
from  swamp  deposits  and  fabricated  into  tools  and  cannon. 
Carding,  spinning,  and  weaving  developed.  Shipbuilding 
made  possible  a  direct  communication  with  foreign  markets, 
and  lumber,  wool,  furs,  skins,  and  cotton  were  exchanged 
for  manufactured  goods.  New  people  came  to  the  country ; 
towns  increased  in  size;  the  movement  westward  grew  in 
volume.  There  was  an  ever-increasing  demand  for  those 
manufactured  goods  with  which  men  might  meet  the  diffi- 
culties of  a  frontier  life,  and  might  reduce  a  wilderness 
to  a  productive  area. 

There  is  no  doubt  that  the  rise  of  the  big  factory  in 
America  was  artificially  retarded  by  restrictive  laws.  The 
United  States  was  fully  half  a  century  behind  Great 
Britain  in  its  industrial  development.  The  Census  of 
1900,  in  describing  the  state  of  industry  at  the  middle  of 
the  Nineteenth  Century,  says:  "It  seems  probable  that 
until  about  the  year  1850  the  bulk  of  general  manufac- 
turing done  in  the  United  States  was  carried  on  in  the 
shop  and  the  household,  by  the  labor  of  the  family  or 
individual  proprietors,  with  apprentice  assistants,  as  con- 
trasted with  the  present  system  of  factory  labor,  com- 
pensated by  wages,  and  assisted  by  power."2  It  is  true, 
however,  that  there  had  already  been  established  in  Lowell 
and  Lawrence,  Massachusetts,  certain  cotton  mills  that  had 

*  U.  S.  Census,  1900,  vol.  vii,  p.  53. 


THE  DISTRIBUTIVE  ORGANIZATION  313 

reached  substantial  proportions.  Some  of  these  mills  were 
built  as  early  as  1830. 

The  character  of  industry  has  great  significance  for  the 
distributive  organization.  In  general,  the  machinery  for 
distributing  goods  will  be  modified  by  the  character  of 
the  commodity,  the  character  of  the  manufacturing  process, 
and  by  the  character  of  the  market.  It  is  important,  there- 
fore, for  an  understanding  of  the  distributive  system,  that 
one  should  have  some  knowledge  of  the  development  of 
industry.  On  the  whole,  American  industry  has  borrowed 
much  from  British  industry.  As  a  matter  of  fact,  Amer- 
ican industry  is  British  industry  transplanted  to  a  new 
country  and  developed  and  modified  by  the  ingenuity  and 
the  independent  thinking  of  the  American  business  man. 
No  sooner  had  the  Declaration  of  Independence  been  issued 
than  there  began  to  grow  up  a  system  of  industry  and  of 
distribution  of  distinctly  national  character.  Simple  in 
its  early  forms,  it  became  increasingly  complex,  being  com- 
pelled to  adjust  itself  to  a  frontier  line  that  moved  ever 
westward,  and  to  a  market  ever  increasing  in  size  and  in 
purchasing  power. 

From  these  simple  beginnings,  the  organization  now  in 
existence  has  risen  as  the  result  of  evolution.  The  manu- 
facturing industry  outgrew  the  household,  and  the  small 
factory  developed  into  the  great  plant.  The  distributive 
system,  likewise,  grew  from  its  simple,  primitive  form  to 
the  great,  complex,  nation-wide  or  world-wide  system  of 
to-day.  The  development  of  industry  and  commerce  can 
be  sufficiently  understood  for  the  purposes  of  this  dis- 
cussion by  calling  attention  to  certain  more  or  less 
definite  stages. 

1.  The  early,  simple  form  of  industry  and  commerce 
is  illustrated  by  such  familiar  types  as  the  tin-peddler, 
the  itinerant  shoemaker,  the  meat-peddler,  and  even  by 
those  who  carry  packs  of  various  commodities  to-day  from 


320  MARKETING 

farmstead  to  farmstead.  Most  frequently,  it  was  the 
maker  or  producer  of  the  goods  that  carried  them  to  the 
consumer.  There  cannot  be  a  more  simple  or  more  direct 
method  than  this,  but  obviously  it  is  not  practicable  when 
conditions  have  become  more  complex.  This  may  be  called 
the  first  stage  of  development. 

2.  The  second  stage  in  the  development  of  our  distribu- 
tive organization  came  when  the  producer  of  goods  built 
his  shop  and  owned  his  tools,  and  his  customers  came  to 
him.  This  is  generally  known  as  the  "bespoke,"  or  cus- 
tom-order, market.  The  raw  material  out  of  which  the 
products  were  made  usually  belonged  to  the  customer  who 
brought  it  to  the  maker  of  goods  and  asked  that  it  be 
worked  up  into  such  products  as  the  consumer  required. 
This  was  true  in  the  making  of  clothing  and  in  the  making 
of  boots  and  shoes.  Even  to-day,  there  are  people  who 
go  to  shoemakers  and  ask  that  shoes  be  made  according 
to  certain  specifications.  This  is  a  remnant  of  an  earlier 
period.  When  industry  was  in  this  stage  of  development, 
the  maker  of  the  goods  was  also  the  merchant  of  the 
goods.  As  a  matter  of  fact,  he  largely  sold  his  services, 
his  skill,  and  his  knowledge.  He  had  no  stock  of  goods, 
and  he  ran  no  business  risk.  Customers  came  to  him 
because  of  his  reputation  as  a  workman,  and  because  of 
personal  relations.  The  significant  thing,  however,  is  that 
he  was  fixed  in  one  place,  that  he  was  permanently  located 
and  the  customers  came  to  him.  It  was  out  of  such  condi- 
tions that  the  factory  and  the  store  developed,  because 
the  shop  of  the  shoemaker  or  of  the  clothing  maker  might 
become  either  a  factory  or  a  store. 

3.  The  third  stage  in  the  development  of  modern  busi- 
ness organization  may  be  called  the  retail-shop  stage.  This 
term  means  that  the  maker  of  goods  found  a  larger  market 
than  formerly  existed  among  his  friends  and  neighbors 
who  had  brought  their  raw  material  to  be  made  up.    The 


THE  DISTRIBUTIVE  ORGANIZATION  321 

maker  of  goods  at  this  stage  of  business  development  began 
to  anticipate  the  market,  and  to  manufacture  goods  before 
he  sold  them.  Out  of  this  situation  there  came,  very 
naturally,  to  be  a  distinction  between  the  maker  function 
and  the  merchant  function.  There  are  other  significant 
characteristics  of  this  new  situation.  When  a  producer 
makes  goods  before  he  has  sold  them  or  has  received  an 
order  for  them,  there  arises  the  beginning  of  a  stock  plan. 
It  is  necessary  for  a  manufacturer  to  determine  the  style 
of  goods  and  the  size  of  goods  that  will  probably  be  de- 
manded. In  order  that  he  may  develop  a  stock  plan  intel- 
ligently, he  must  know  beforehand  what  sizes  and  what 
styles  will  likely  be  asked  for.  But  probably  more  sig- 
nificant still  is  the  fact  that  when  he  had  stock  on  hand 
and  a  customer  came  into  his  shop  to  buy  goods,  there  arose 
a  price  bargaining.  It  is  clear,  then,  that  this  manufac- 
turer was  also  a  merchant  and  had  become  a  price  bar- 
gainer. 

4.  The  next  stage  in  the  development  of  modern  busi- 
ness organization  may  be  called  the  wholesale-order  stage. 
At  this  point  in  the  development  of  business,  there  was  a 
large  stock  of  goods  on  hand.  The  manufacturer  of  these 
goods  had  made  them  in  large  lots  in  accordance  with 
orders  previously  received  from  a  merchant  who  under- 
took to  sell  them.  This  means  that  there  was  an  earlier 
anticipation  of  the  market  demand.  The  goods  were 
turned  over  in  large  or  wholesale  lots  to  an  individual 
whose  sole  function  was  that  of  a  merchant.  Since  he 
sold  the  goods  in  small  lots  to  the  consumer,  he  was  called 
a  retailer.  In  this  stage  there  were  two  price  bargains; 
one  between  the  wholesaler  and  the  manufacturer,  and  the 
other  between  this  wholesale  merchant  and  the  consumer. 

In  connection  with  this  type  of  business  organization, 
there  arose  a  distinction  between  the  wholesale  merchant 
and  the  retail   merchant.     The  functions  of  wholesaler 


322  MARKETING 

were  to  buy  from  the  manufacturer  in  large  lots,  running 
the  risk  of  selling  these  goods  at  a  profit  to  another  mer- 
chant who  sold  them  to  the  consumer.  Another  added 
price  bargain  began.  There  was  the  price  paid  by  the 
wholesaler  to  the  manufacturer,  the  price  paid  by  the  re- 
tailer to  the  wholesaler,  and  the  price  paid  by  the  con- 
sumer to  the  retailer.  Obviously,  as  the  process  became 
more  complex,  it  was  necessary  for  the  producer  to  make 
his  goods  a  longer  time  before  they  were  sold.  There  was 
then  a  longer  and  greater  risk  for  all  those  who  handled  the 
goods.  If  the  manufacturer  made  only  upon  order  from 
the  wholesaler,  he  was  comparatively  safe.  But  he  thereby 
lost  connection  with  the  market.  If  the  wholesaler  sold 
only  to  the  retailer,  he  likewise  lost  connection  with  the 
consumer.  It  is  clear  that  in  this  situation,  the  retailer 
stands  squarely  between  the  wholesaler  and  the  consumer, 
and  the  wholesaler  and  retailer  divide  the  manufacturer 
from  the  consumer.  Thus,  the  retailer  became  of  greater 
and  greater  importance.  He  alone  knew  at  first  hand  the 
consumer  market.  He  alone  was  in  the  position  to  know 
definitely  the  changes  in  wants  among  consumers.  It  was 
he  who  was  in  a  position  to  forecast  most  definitely  what 
the  market  would  need.  It  was  through  him  that  the 
orders  came  to  the  wholesaler. 

5.  The  fifth  stage  in  the  development  of  modern  busi- 
ness organization  may  be  called  the  wholesale-retail-specu- 
lative stage.  The  wholesaler  now  buys  goods  in  anticipa- 
tion of  the  market  demand.  He  speculates.  So  does  the 
retailer.  Here,  there  are  other  price  bargains.  As  before, 
the  first  price  bargain  is  between  the  manufacturer  and  the 
wholesaler;  the  second  is  between  the  wholesaler  and  the 
retailer ;  the  third  is  between  the  retailer  and  the  consumer. 
In  this  stage,  the  risks  of  business  squarely  rest  upon  the 
wholesalers  and  retailers,  and  the  manufacturers  are  free 
from  risk  only  in  case  they  wait  for  orders  to  come  to  them. 


THE  DISTRIBUTIVE  ORGANIZATION  323 

This  condition  has  been  greatly  modified  in  late  years 
because  the  manufacturer  also  has  speculated  as  to  what 
the  market  will  demand.  To-day,  the  up-to-date  manufac- 
turer pre-plans  his  work.  He  sets  his  task  for  six  to 
twelve  months  ahead  and  makes  goods  which  he  anticipates 
the  market  will  demand.  One  manufacturer  set  his  tasks 
for  five  years  ahead,  and  he  has  worked  according  to  the 
details  of  that  plan  ever  since. 

But  upon  what  basis  can  the  manufacturer  pre-plan  his 
work  ?  It  is  only  upon  his  knowledge  of  the  market.  This 
knowledge  of  the  market  he  can  receive  only  through  his 
sales  organization  or  the  middlemen  who  deal  with  him. 
As  long  as  the  wholesaler  and  retailer  stand  between  him 
and  the  consumer  market,  he  must  rely  upon  their  judg- 
ment. Not  satisfied  with  such  a  situation,  the  manufac- 
turer may  endeavor  by  every  means  at  his  disposal  to 
secure  independently  information  as  to  the  trend  of  mar- 
ket demand.  The  important  consideration,  however,  is 
that  when  the  producer  makes  goods  and  the  middleman 
buys  goods,  before  they  have  been  ordered,  they  must 
all  share  the  speculative  risks  of  business.  As  the  con- 
dition now  stands,  therefore,  the  risk  in  modern  business 
is  shared  by  retailers,  wholesalers,  and  manufacturers,  all 
of  whom  are  attempting  to  guess  what  the  consumers  will 
ask  for.  Risk  of  this  sort  always  leads  to  an  attempt  to 
control  the  demand,  and  out  of  this  condition  has  come  the 
effort  by  the  manufacturer,  by  the  wholesaler  and  jobber, 
and  by  the  retailer,  to  control  the  consumer  market. 

These,  in  general,  are  the  stages  in  the  development  of 
industry  and  trade  in  the  United  States.  There  are  some 
specific  points  to  be  noted  in  regard  to  the  rise  of  the  mid- 
dleman in  the  organization  to  handle  manufactured  goods. 
In  the  first  place,  the  importer  was  usually  the  wholesaler 
until  after  the  War  of  1812.  Even  up  to  the  period  of  the 
Civil  War,  most  wholesalers  did  an  importing  business. 


324  MARKETING 

"The  organized  system  of  distribution  as  it  existed  up  to 
1860  included  importers,  who  supplied  various  foreign- 
made  goods;  brokers,  who  marketed  the  products  of  the 
New  England  textile  mills;  wholesalers,  who  were  some- 
times importers,  as  we  have  seen,  and  who  otherwise  pur- 
chased from  importers,  brokers,  commission  men,  and  from 
producers  direct;  and  retailers."3  Until  after  the  Civil 
"War,  it  was  the  business  custom  also  for  retailers  to  go  to 
the  wholesale  centers  once  or  twice  each  year  to  purchase 
their  goods.  Commercial  travelers  have  developed  since 
the  middle  of  the  Nineteenth  Century. 

It  is  clear  that  the  development  of  the  distributive  system 
was  first  toward  complexity.  The  variety  of  goods  was 
greatly  increased  arid,  as  the  markets  grew  in  size  and  im- 
portance, men  confined  themselves  more  and  more  nar- 
rowly to  a  specialized  function.  There  came  to  be,  there- 
fore, fairly  distinct  types,  such  as  wholesalers,  brokers, 
jobbers,  commission  men,  factory  agents,  and  retailers. 
Varieties  of  goods  greatly  increased  in  number.  It  is  a 
significant  fact  that  in  the  average  grocery  store  of  to-day 
there  will  be  found  from  750  to  1,000  different  brands  of 
goods.  Large  grocery  stores  often  carry  as  many  as  5,000 
different  brands. 

Another  characteristic  of  the  earlier  period  in  the  devel- 
opment of  the  distributive  organization  is  the  fact  that  the 
merchant  was  generally  a  passive  agent.  The  customers 
came  to  him  to  purchase  their  goods.  This  was  in  the  days 
before  the  advent  of  traveling  salesmen  and  drummers  and 
advertising.  In  the  later  stage  of  development,  however, 
there  has  been  a  tendency  toward  simplicity.  In  general, 
the  distributive  organization  to-day  for  handling  manu- 
factured goods  is  simpler  than  the  organization  for  han- 
dling raw  materials  and  farm  products.  It  is  important  to 
inquire  the  cause  of  this  tendency  toward  simplicity. 

3  Nystrom,  Economics  of  Retailing,  p.  30. 


THE  DISTRIBUTIVE  ORGANIZATION  325 

The  chief  factors  making  for  a  simplification  of  the  dis- 
tributive organization  are:  (1)  the  development  of  large- 
scale  production;  (2)  the  standardization  of  goods;  (3)  the 
assumption  of  different  functions  by  dealers  and  manu- 
facturers. 

With  the  tremendous  increase  in  market  demand,  due  to 
an  increase  in  population  and  in  purchasing  power,  and 
with  the  standardization  of  machine  processes  in  produc- 
tion, there  developed  what  may  be  called  large-scale  dis- 
tribution. There  are  jobbers  to-day  who  have  as  many  as 
300,000  accounts  upon  their  books.  There  are  many  dis- 
tributive organizations  that  cover  the  entire  country.  Re- 
tailers in  large  trade  centers  do  many  millions  of  dollars' 
worth  of  business  every  year.  As  the  volume  of  goods  which 
they  handled  increased,  as  these  goods  became  standardized 
by  trade  mark  and  trade  name  so  that  they  could  be  sold 
by  sample  or  by  description,  their  distribution  became  a 
simpler  problem.  "With  this  increase  in  the  volume  of  busi- 
ness came  an  increase  in  the  number  of  manufacturers  and 
dealers. 

201.  Channels  of  Distribution. — There  are  several 
channels  open  to  the  manufacturer  for  securing  distribu- 
tion of  his  goods.  The  one  which  he  may  select  will  be  de- 
termined largely  by  the  character  of  the  commodity  which 
he  makes  and  by  the  market  which  he  supplies.  Even  here, 
however,  business  custom  will  be  a  considerable  factor. 

The  simplest  form  of  distribution  is  from  producer  di- 
rect to  consumer.  In  this  case,  the  sales  may  be  made  by 
mail.  A  manufacturer  of  stoves,  for  example,  sells  his  goods 
direct  to  consumers  by  means  of  a  catalogue.  But  the  pro- 
ducer may  distribute  his  goods  through  salesmen  and  can- 
vassers. Manufacturers  have  found  that  college  students 
may  prove  themselves  to  be  efficient  salesmen  during  their 
summer  vacation.  Aluminum  kitchen  utensils  have  found 
a  nation-wide  sale  through  this  medium.     Whether  this 


326  MARKETING 

method  will  be  selected  or  not  depends  upon  the  effective- 
ness to  which  it  can  attain.  In  certain  cases,  however,  it 
becomes  necessary  for  the  manufacturer  to  maintain  con- 
trol over  his  commodity  until  it  reaches  the  hands  of  the 
consumer.  In  this  case,  he  will  seek  this  simple  form  of 
organization.  Experience,  however,  has  not  demonstrated 
that  costs  of  distribution  have  been  greatly  reduced  by  this 
means. 

Another  type  of  distributive  organization  is  that  in  which 
the  producer  sells  direct  to  the  retailer.  This  type  of  or- 
ganization has  a  variety  of  forms.  The  manufacturer  may 
sell  without  restriction  to  all  retailers  who  care  to  handle 
his  commodities,  or  the  manufacturer  may  restrict  his 
sales  to  exclusive  retail  stores.  The  manufacturer  may  es- 
tablish his  own  retail  stores  and  reach  the  consumer  through 
them.  Some  manufacturers  sell  to  mail-order  houses  or 
other  consignment  agencies. 

"Whether  or  not  the  manufacturer  will  employ  this  type 
of  distributive  organization,  and  what  variety  he  will  em- 
ploy, will  depend  upon  the  character  of  the  commodity  and 
the  character  of  the  market.  The  large  bakers  in  the  cities 
sell  their  bread  direct  to  retailers.  It  is  claimed  that  with 
such  a  product  and  such  a  market,  it  is  necessary  for  the 
manufacturer  to  maintain  direct  connection  with  the  retail 
trade.  The  baker  is  always  in  a  relatively  close  proximity 
to  his  market.  Bread  is  a  perishable  commodity  and  is 
presumably  to  be  eaten  fresh  and,  therefore,  must  be  dis- 
tributed daily.  The  producer  must  be  in  a  position  to 
supply  bread  on  short  notice.  Variations  in  demand  are 
strong  and  of  substantial  proportions.  The  capacity  of 
market  demand  must  be  gauged  instantly.  The  baker, 
therefore,  can  operate  successfully  only  through  close  con- 
nection with  the  trade.  The  wholesaler  and  the  jobber  are 
thus  automatically  eliminated. 

Another  type  of  distributive  organization  is  the  one  where 


THE  DISTRIBUTIVE  ORGANIZATION  327 

the  producer  sells  to  the  wholesaler,  the  wholesaler  to  the 
retailer,  and  the  retailer  to  the  consumer.  In  this  type,  too, 
there  are  several  varieties.  The  manufacturer  may  sell 
through  any  wholesaler  who  in  turn  is  left  free  to  sell 
through  any  retailer.  Or,  the  producer  may  reach  out  to 
absorb  the  wholesale  function,  thus  creating  his  own  terri- 
torial agents,  who  are  free  to  sell  to  any  retailer.  Again, 
these  territorial  agents  may  sell  to  exclusive  agents. 

In  practice,  it  is  largely  a  matter  of  individual  policy, 
or  even  of  temperament,  on  the  part  of  the  manufacturer,  as 
to  whether  or  not  he  will  use  this  type  in  any  of  its  varie- 
ties. It  is  most  complex  in  character  and  ought  to  persist 
only  because  it  is  economically  effective.  The  estimate  has 
been  made  that  90  per  cent  of  groceries  pass  through  the 
hands  of  jobbers.  In  the  marketing  of  textile  goods  the 
jobber  is  a  very  important  factor.  "A  study  of  retail  con- 
ditions in  the  dry  goods  field  shows  at  least  one  thing  with 
perfect  clearness.  The  jobber  performs  an  essentially  eco- 
nomic function.  We  hear  much  talk  of  the  elimination  of 
the  jobber ;  but  there  is  no  other  expedient  method  for  the 
distribution  of  a  very  large  part  of  the  dry  goods  mer- 
chandise. "  4  It  has  been  stated,  on  the  other  hand,  that 
the  jobber  will  have  to  go ;  that  there  is  no  place  for  the 
big  jobbing  concern. 

A  large  manufacturer  of  paint,  with  a  national  or  even 
an  international  market,  sells  his  products  to  exclusive  re- 
tailers through  his  own  territorial  agents.  In  this  case,  it 
works  successfully.  The  manufacturer  of  a  breakfast  cereal 
deals  through  jobbers  who  handle  for  him  hundreds  of  thou- 
sands of  small  retail  accounts.  He  is  able  to  compete  suc- 
cessfully with  mail-order  houses  and  other  distributive 
types,  even  including  a  nation-wide  chain-store  system 
that  makes  its  own  breakfast  food. 

Farm  implements  are  marketed  through  three  main  chan- 

*  The  Merchandising  of  Textiles,  p.  28. 


328  MARKETING 

nels.  Some  manufacturers  sell  through  branch  houses  to 
farmer  agents,  to  specialty  dealers,  to  automobile  dealers 
or  garage  men,  or  by  blockmen  and  canvassers  in  coopera- 
tion with  implement  dealers,  to  the  farmers.  Other  manu- 
facturers sell  through  distributors  to  implement  dealers, 
farm  agents,  specialty  dealers,  or  automobile  dealers  and 
garage  men  to  the  consumers.  In  competition  with  these 
methods  of  selling,  there  are  manufacturers  that  sell  by 
mail  direct  to  consumers.  Direct  selling,  it  is  claimed,  is 
likely  to  prove  too  expensive  for  success.  Mail-order  busi- 
ness, therefore,  will  probably  not  be  an  important  factor. 
Farmer  agents  are,  as  a  rule,  not  effective  sales  agents, 
and  often  ruin  a  manufacturer's  market  through  price  cut- 
ting. The  only  apparent  ultimate  solution  is  to  be  found 
in  building  up  an  independent  retail  organization  through 
specialty  dealers. 

An  added  link  may  be  placed  in  the  distributive  chain 
of  this  last  type.  A  selling  agent,  an  importer,  a  broker, 
or  a  commissioned  agent  may  be  interposed  between  the 
manufacturer  and  the  wholesaler.  In  the  marketing  of 
cotton  and  woolen  goods  there  are  commission  houses  which 
help  to  finance  the  mills  and  sell  their  products.  A  com- 
mission house  may  represent  from  five  to  fifteen  mills.  This 
middleman  institution  is  found  in  all  kinds  of  textile  trades 
and  also  handles  other  articles  that  are  sold  through  dry- 
goods  stores. 

In  the  shelf -hardware  trade,  the  manufacturer's  agent  is 
a  prominent  factor.  The  reason  for  the  existence  of  inter- 
mediaries between  hardware  manufacturers  and  jobbers  is 
found  in  the  fact  that  many  hardware  manufacturers  con- 
fine their  attention  to  single  articles,  or  single  lines  of 
articles.  For  example,  one  manufactures  nothing  but 
scissors,  another  saws,  another  wrenches,  and  so  on.  Fur- 
thermore, many  such  manufacturers  have  relatively  small 
outputs,  and  a  good  many  of  them  are  located  at  a  dis- 


THE  DISTRIBUTIVE  ORGANIZATION  329 

tance  from  market  centers,  so  that  they  find  it  difficult  to 
keep  in  touch  with  trade  conditions.5  This  agent  will  han- 
dle the  business  for  several  different  manufacturers,  never 
as  a  rule  acting  as  an  agent  for  manufacturers  in  directly 
competing  lines.  Usually  the  agent  charges  a  commission 
on  his  sales  to  repay  him  for  his  services. 

Brokers  may  be  found  in  many  lines  of  goods.  They  are 
of  substantial  importance  in  the  canned  and  preserved- 
food  trade.  There  are  three  parts  to  the  distributive  sys- 
tem for  food:  the  first  may  be  called  the  distributive  ma- 
chinery for  the  primary  markets,  which  carries  the  goods 
from  manufacturer  or  producer  into  the  large  trade 
centers;  the  secondary  market  is  the  wholesale  system; 
the  tertiary  market  consists  of  retailers.  It  is  in  the  sec- 
ondary, or  wholesale,  market  that  the  broker  operates.  The 
unbranded  staples  have  most  need  for  a  broker.  Usually 
a  general  broker  handles  such  goods.  Specialty  brokers 
handle  branded  goods.  In  general,  the  broker's  functions 
are  to  serve  as  adviser  and  arbitrator,  as  assembler,  and  as 
financial  agent.  He  has  a  dual  responsibility:  (a)  to  the 
manufacturer,  to  sell  at  an  advantageous  price,  and  (&)  to 
the  jobber,  to  afford  him  an  opportunity  to  buy  at  a  con- 
venient time  and  place.  He  will  need  to  struggle  to  keep 
his  place. 

Even  in  such  a  relatively  simple  organization  as  that 
which  exists  for  the  distribution  of  wrapping  paper,  a  few 
brokers  may  be  found.  The  broker  is,  however,  for  the 
most  part  a  persona  non  grata  to  manufacturers  and  job- 
bers ;  they  both  consider  him  an  excrescence,  and  probably 
with  the  development  of  trade  associations  and  the  "get- 
together"  meetings  between  manufacturers  and  jobbers,  he 
will  be  eliminated.  The  influence  and  the  volume  of  busi- 
ness done  by  the  broker  are  decreasing  in  the  distributive 

"Weld,  Quarterly  Journal  of  Economics,  August,  1917,  p.  579. 


330  MARKETING 

organization  for  handling  of  finished  products,  because  it 
is  becoming  more  and  more  effectively  organized.  The 
broker  becomes  a  useless  appendage  when  the  jobber  or  the 
retailer  can  meet  the  producer. 

202.  Choosing  Proper  Agencies. — The  problem  of  select- 
ing the  most  effective  distributive  medium  involves  a  study 
of  the  commodity  and  its  market,  actual  and  potential. 
There  is  also  the  consideration  of  the  volume  of  business 
that  is  done  or  sought.  The  fundamental  question  to  an- 
swer in  regard  to  the  service  of  all  middlemen  is  whether 
or  not  the  amount  of  business  done  will  justify  the  assump- 
tion of  middlemen's  functions.  In  so  far  as  they  have 
knowledge,  men  do  what  pays  them  best.  Many  manufac- 
turers lacking  imagination  and  perspective  drift  along  old- 
established  channels.  Others  beat  out  for  themselves  new 
paths  to  market.  A  manufacturer  of  typewriters  had  the 
courage  recently  to  break  away  from  precedent  in  the 
channel  of  distribution  for  his  products.  He  dismissed  15,- 
000  salesmen  and  agents  and  abandoned  branch  offices  in 
50  cities,  and  has  undertaken  to  sell  typewriters  by  mail 
direct  to  consumers.  "When  a  manufacturer  of  wagons 
dismissed  his  agents  in  the  small  towns  throughout  the 
region  where  his  product  was  sold,  and  tried  the  direct- 
by-mail  sales  method,  he  met  with  disappointment. 

If  the  goods  to  be  marketed  are  shopping  lines,  they  must 
be  on  hand  in  shopping  centers.  If  they  are  convenience  or 
emergency  goods,  they  must  be  placed  in  convenient  places 
or  where  they  can  be  had  in  an  emergency.  Certain  prod- 
ucts require  specialists  as  salesmen,  such,  for  example,  as 
cash  registers,  comptometers,  automobiles,  and  so  on.  The 
distributive  organization  must  provide  them.  The  character 
of  the  commodity  must  always  be  an  important  considera- 
tion, and  yet  the  same  commodity  can  be  marketed  under 
competition  with  apparently  equal  success  by  different 
methods.     Flour,  for  instance,  is  sold  direct  to  retailers 


THE  DISTRIBUTIVE  ORGANIZATION  331 

through  branch  offices ;  it  is  also  sold  to  jobbers ;  it  is  sold 
to  brokers  who  selL  to  jobbers,  who  in  turn  sell  to  retailers 
or  to  brokers;  it  is  sold  direct  to  bakers  by  flour  millers. 
The  same  manufacturer  may  use  more  than  one  method  at 
once.  He  may  sell  special  grades  to  bakers,  branded  varie- 
ties to  large  retailers,  and  different  kinds  to  jobbers  and 
brokers. 

As  the  manufacturers  assume  the  functions  of  middle- 
men, they  must  necessarily  develop  a  sales  organization. 
This  means  that  the  market  must  be  reached  by  salesmen 
carrying  a  single  line  of  goods.  A  jobber,  for  instance,  can 
carry  many  lines,  as  in  the  hardware  trade,  and  reduce  the 
sales  expense.  The  manufacturer,  therefore,  must  ask 
himself  the  question  as  to  whether  or  not  he  can  afford  the 
expense  of  duplicating  an  organization  already  in  exist- 
ence, established  by  wholesalers  or  jobbers.  He  must  also 
consider  the  fact  that  the  wholesaler  or  jobber  carries  many 
lines  besides  his  own,  while  the  organization  established 
by  himself  would  concentrate  on  what  he  has  to  sell. 

The  whole  problem  of  selecting  the  most  effective  channel 
of  distribution  resolves  itself  into  the  following  considera- 
tions : 

1.  The  character  of  the  product. 

2.  The  volume  of  business. 

3.  The  size  and  character  of  the  market. 

4.  Financial  considerations. 

5.  The  problem  of  service  to  consumers. 

6.  The  problem  of  credits. 

Through  all  of  these  problems  there  runs  the  pervading 
influence  of  consumer  demand.  One  manufacturer  may  be 
willing  to  take  orders  from  a  wholesaler  or  a  retailer,  leav- 
ing a  full  knowledge  and  control  of  the  market  demand  to 
him.  Another  may  decide  to  reach  out  toward  the  market 
himself.   The  strategic  point  in  marketing  finished  goods  is 


332  MARKETING 

consumer  contact.  Consumer  demand  must  be  directed 
toward  and  tied  to  the  products  of  a  given  producer  before 
he  can  gain  the  desired  control.  Hence,  the  rise  of  branded 
goods,  trade-marks,  trade  names,  and  advertising. 

203.  Types  of  Trade  Organization. — There  are  various 
channels  of  distribution  that  are  employed  by  the  manu- 
facturers of  shirts  and  collars.  For  high-grade  shirts  and 
for  practically  all  collars  the  line  of  distribution  runs  from 
manufacturer  to  retailer.  Jobbers  were  formerly  a  more 
important  factor  here  than  at  present;  the  manufacturers 
have  reached  past  them  to  the  retailer.  In  work  shirts  and 
in  low-priced  lines  the  jobbers  have  more  nearly  held  their 
own.  Some  manufacturers  sell  direct  to  mail-order  houses, 
and  a  few  sell  direct  to  the  consumer.6 

In  the  hosiery  industry,  the  manufacturers  sold  only  to 
jobbing  houses,  who  in  turn  sold  to  the  retailers.  The 
major  part  of  this  line  of  goods  is  still  handled  by  jobbers, 
but  there  is  an  increasing  volume  of  business  done  by  manu- 
facturers directly  with  the  retail  trade.  In  the  East  and 
South,  manufacturers  are  still  using  jobbers  and  commis- 
sion houses.  This  change  in  selling  method  has  developed 
along  with  the  development  of  brands  for  hosiery.7 

In  the  women's  muslin  underwear  trade,  there  is  like- 
wise a  tendency  to  eliminate  the  jobber.  Manufacturers 
are  rapidly  turning  directly  to  the  retailer.  Business  with 
mail-order  houses  is  also  rapidly  increasing  in  volume. 
"Several  causes  have  been  instrumental  in  determining  this 
condition,  probably  the  principal  one  being  the  rapid  change 
in  styles  during  the  last  few  years.  This  has  had  a  tend- 
ency to  cause  smaller  and  more  frequent  orders,  and  the 
consequent  effort  of  the  manufacturer  is  to  get  as  close 

"Bureau  of  Foreign  and  Domestic  Commerce,  Miscellaneous  Series, 
No.  36,  p.  100. 

1  Bureau  of  Foreign  and  Domestic  Commerce,  Miscellaneous  Series, 
No.  31,  p.  158. 


THE  DISTRIBUTIVE  ORGANIZATION  333 

to  the  consumer  as  possible.  It  was  stated  that  some  es- 
tablishments have  solicitors  who  go  even  to  the  residences 
of  individual  consumers. ' ' 8 

Wrapping  paper  finds  its  great  market  among  retailers, 
such  as  department  stores,  mail-order  houses,  and  other  big 
users  of  paper.  In  most  cases  it  goes  through  only  one 
middleman,  the  jobber.  There  are  instances,  however, 
where  it  passes  through  the  hands  of  a  broker,  a  jobber, 
and  a  peddler  before  it  reaches  the  consumer.  Usually  the 
manufacturer  sends  his  representatives  to  the  jobber,  and 
sometimes  to  the  large  consumers.  Such  agents  solicit  or- 
ders for  future  delivery  from  the  prospective  clients.  The 
manufacturer  reaches  the  broker  and  resident  mill  agent 
through  correspondence.  The  broker  differs  from  the  mill 
agent  in  that  he  represents  several  manufacturers,  while 
the  mill  agent  represents  but  one.  The  large  jobber  has  a 
sales  force  that  calls  on  the  trade  daily;  the  small  jobber 
is  usually  a  peddler  himself.  This  latter  dealer  calls  at 
the  jobber's  warehouse  and  gets  his  load  of  paper,  daily, 
and  carries  his  goods  from  place  to  place,  selling  for  cash. 
He  is  an  itinerant  dealer,  calling  on  those  small  consumers 
whose  trade  the  large  jobber  does  not  desire.  When  the  dis- 
tributive system  becomes  better  organized,  this  peddler 
will  give  way  to  the  more  economical  jobber.  A  little  paper 
is  sold  directly  to  the  largest  consumers.9 

A  generalized  method  of  marketing  shelf-hardware  is 
shown  by  the  accompanying  organization  chart.  In  outlines 
it  is  simple,  but  it  shows  that  manufacturers  have  in  this 
case  also  found  a  way  past  the  jobber  to  the  retailer. 
It  is  to  be  noted  that  the  most  conspicuous  figure  in  this 
type  of  organization  is  the  jobber.  The  reason  for  this 
fact  is  said  to  be  that  such  a  variety  of  articles  is  included 

•Bureau  of  Foreign  and  Domestic  Commerce,  Miscellaneous  Series, 
No.  29,  p.  124. 
•  Cf .  Levine,  Marketing  Wrapping  Paper. 


334 


MARKETING 


in  the  hardware  line  that  no  single  manufacturer  can  pro- 
duce them  all.  Many  different  factories  are  required.  Au- 
tomobile tires,  tinplate,  and  paints,  not  to  mention  the  dif- 
ferent kinds  of  cutlery,  can  be  made  more  efficiently  by 
several  plants.  Hence,  there  must  be  some  agency  for  con- 
centrating them.    This  function  is  performed  by  the  jobber. 


MFG. 


CONTRACT  M'F'G. 


JOBBER'S  OWN 
FACTORY 


IMPORTER 


MARKET   ORGANIZATION   CHART  FOR   SHELF  HARDWARE 


Furniture  reaches  the  market  by  several  different  routes. 
The  most  important,  from  the  standpoint  of  the  volume  of 
business,  is  the  method  of  marketing  the  goods  directly 
from  the  manufacturer  to  the  retail  dealer.  It  has  been 
estimated  that  approximately  75  per  cent  of  all  the  furni- 
ture output  is  sold  directly  through  the  factory's  own  sales 
force.  Furniture  is  also  sold  through  mail-order  houses, 
through  chain  stores,  and  even  through  "  f rom-f actory-to- 
family"  methods.  Sometimes  factory  representatives  or 
selling  agents  exhibit  samples  in  showrooms  where  dealers 
come  to  buy.  There  is  also  a  peculiar  type  of  distribution 
that  may  be  called  jobbing.    A  company  may  rent  furni- 


THE  DISTRIBUTIVE  ORGANIZATION  335 

ture-exhibition  rooms,  may  buy  outright  from  manufac- 
turers and  sell  outright  to  dealers.  It  thus  performs  the 
functions  of  assembling,  sorting,  and  distributing  in  small 
lots.  The  same  arguments  apply  to  the  jobbing  function 
here  as  in  shelf  hardware. 

The  fact  that  different  commodities,  even  in  the  same  line 
of  goods,  may  find  different  channels  to  market,  may  be 
illustrated  in  many  ways.  A  certain  wood  varnish  was  at 
first  sold  through  paint  dealers,  where  it  seems  logically 
to  belong.  It  was  later  tried  through  drug  stores,  but  now 
meets  its  greatest  sale  through  grocery  stores.  A  manu- 
facturer of  furniture  also  makes  humidors.  He  has  found 
his  best  medium  of  distribution,  not  through  furniture 
dealers,  but  through  cigar  stores. 

The  case  of  agricultural  implements  is  one  in  point.  In 
each  instance  shown  in  the  accompanying  chart  the  charac- 
ter of  the  commodity  in  its  relation  to  the  market,  together 
with  business  tradition,  has  determined  the  type  in  use. 

The  typical  trade  organization  for  handling  typewriters 
is  to  sell  through  manufacturers'  agents  located  in  all  the 
large  trade  centers.  In  foreign  business  there  are  also 
many  branch  offices.  Recently,  however,  as  already  noted, 
a  new  kind  of  distributive  organization  has  appeared  in  the 
market.  In  the  case  cited  there  has  been  a  distinct  attempt 
to  eliminate  all  salesmen,  and  all  agents  and  agencies.  The 
offices  in  50  cities  have  been  disbanded;  15,000  salesmen 
and  agents  have  been  dismissed.  The  underlying  idea  in 
this  new  type  of  trade  organization  is  to  escape  the  evident 
evils  in  the  typewriter  sales  organization,  the  most  impor- 
tant of  which  have  been  a  subsidizing  of  business  colleges 
and  the  acceptance  of  old  machines  in  part  payment  for 
new  ones.  The  new  method  is  to  sell  direct  to  the  consumer 
by  mail,  on  the  ground  that  this  machine  is  sufficiently 
standardized,  sufficiently  reliable,  and  sufficiently  well- 
known  to  be  sold  by  description  rather  than  by  inspection. 


33G 


MARKETING 


The  appeal  in  this  new  method  is  distinctly  on  the  basis 
of  price. 

In  the  marketing  of  certain  household  electrical  appli- 
ances there  are  four  different  channels  of  distribution  in 
use.  These  articles  are  sold  (1)  direct  to  a  jobber,  through 
a  "central  station"  or  through  a  dealer  to  the  consumer; 
(2)  to  the  "central  station"  through  a  dealer  to  the  con- 


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sumer;  (3)  to  the  dealer  outright;  and  (4)  direct  to  the 
consumer.  By  "central  station"  is  meant  a  power  plant 
for  generating  electric  current.  Generally  the  goods  are 
not  sold  direct  to  the  consumer  unless  the  money  accom- 
panies the  order ;  otherwise  the  order  is  turned  over  to  a 
dealer.  In  this  type  of  organization  the  jobber  is  holding 
his  own,  the  manufacturers  leaving  to  him  a  study  of  the 
market,  credit  risks,  and  sales  management. 

These  examples  of  trade  organization  will  illustrate  vari- 


THE  DISTRIBUTIVE  ORGANIZATION  337 

ous  phases  of  the  distributive  problem.  It  will  be  seen  that 
in  most  instances  there  is  a  trend  toward  further  simplifi- 
cation ;  the  aim  is  to  have  goods  move  as  directly  as  possi- 
ble to  the  consumer.  In  marketing  manufactured  products 
costs  are  constantly  running  against  them  until  they  reach 
the  consumer.  Every  middleman  has  his  costs  of  operation 
and  his  profits  to  cover.  The  longer  the  time  that  the  goods 
are  on  the  way,  the  higher  the  interest  charge  for  financing 
them.  With  improved  facilities  for  communication  and  for 
transportation,  the  retailer  may  buy  more  nearly  direct 
from  the  factory  and  more  frequently,  and  the  manufac- 
turer may  be  in  a  better  position  to  reach  the  consumer 
market.  But  the  most  important  influence  for  change  is  to 
be  found  in  the  struggle  between  the  large  manufacturer, 
the  large  jobber,  and  the  large  retailer,  for  a  control  over 
consumer  demand. 

204.  Chaos  in  Trade  Organization. — There  are  strong 
influences  making  for  radical  changes  in  methods  of  selling 
finished  goods  to-day.  These  are  primarily  due  to  the  new 
status  of  certain  manufacturers,  jobbers,  and  retailers, 
which  has  the  following  causes.  The  great  increase  in  the 
market,  with  a  rapidly  developing  country  and  a  popula- 
tion increasing  fast  both  in  numbers  and  purchasing  power, 
made  for  a  much  larger  volume  of  business.  Certain  manu- 
facturers found  themselves  in  advantageous  positions  in 
this  expanding  market  and  became  "big"  manufacturers; 
certain  jobbers  multiplied  their  volume  of  business  many 
times  over ;  certain  retailers  likewise  grew  in  financial  power 
and  in  volume  of  trade. 

Under  these  changing  conditions  the  manufacturers,  with 
their  standardized  processes  and  vast  output  of  goods,  be- 
gan to  realize  that  they  did  not  control  either  the  raw 
materials  or  the  market  for  their  goods.  They  began  then 
to  reach  back  toward  the  source  of  materials  and,  looking 
forward  toward  the  market,  began  to  identify  their  goods 


338  MARKETING 

by  trade  marks  and  trade  names.  They  began  to  adver- 
tise their  goods  to  the  consumer  in  national  campaigns. 

The  jobber,  when  he  realized  that  the  manufacturer  was 
reaching  past  him,  began  also  to  identify  the  goods  which 
he  handled.  Some  of  the  well-known  brands  to-day,  in 
hardware,  for  instance,  and  hosiery,  are  jobbers'  names. 
This  middleman  found  it  difficult,  however,  to  sell  stand- 
ardized goods  bought  from  different  manufacturers.  In 
some  cases,  therefore,  he  reached  out  to  control  manufac- 
turing. Just  as  the  manufacturer  assumed  his  function, 
he  in  turn  began  to  manufacture.  Both  manufacturer  and 
jobber  appealed  to  retailer  and  consumer. 

Certain  retailers,  in  their  turn,  became  unwilling  to  re- 
main passive.  In  finances  they  were  independent  of  the 
jobber;  their  business  justified  their  buying  in  wholesale 
lots.  But,  in  handling  goods  identified  with  trade  marks 
and  trade  names  of  manufacturers  and  jobbers,  the  re- 
tailers became  more  and  more  mere  order  takers.  Thus, 
they  too  put  brands  on  goods  and  advertised.  Their  stra- 
tegic position  arose  from  the  fact  that  they  met  the  con- 
sumer face  to  face. 

During  recent  years  these  three,  the  big  manufacturer, 
the  big  jobber  and  the  big  retailer,  have  been  struggling 
for  the  control  of  consumer  demand.  Their  efforts  have 
tended  to  disrupt  existing  trade  organizations  and  have  on 
the  whole  tended  toward  simplification.  Out  of  this  strug- 
gle have  risen  the  problems  of  advertising,  of  trade-marks, 
trade  names,  dealer  helps,  of  defense  and  offense,  that  char- 
acterize business  to-day. 

Suggestions  for  Study 

The  student  should  study  the  trade  organization  con- 
nected with  his  special  commodity.  An  organization  chart 
will  prove  helpful  in  understanding  relationships.  The 
following  topics  will  serve  for  classroom  study: 


THE  DISTRIBUTIVE  ORGANIZATION  339 

1.  Source  of  confusion  in  the  distributive  organization. 

2.  The  problem  of  exclusive  agencies. 

3.  The  character  of  the  commodity  in  relation  to  the   dis- 

tributive organization. 

4.  The  relative  importance  of  wholesaler  and  retailer  in  con- 

trolling consumer  demand. 

5.  The  position  of  the  general  store. 

6.  The  assumption  by  the  manufacturer  of  distributive  func- 

tions. 

7.  Distributive  organization  and  the  market. 

8.  The  future  of  the  jobber. 

Readings  : 

Nystrom,  Economics  of  Retailing,  Chap.  II. 

Cherington,  Advertising  as  a  Business  Force,  Chap.  II. 

Mahin,  Advertising,  Chap.  X. 

Calkins  and  Holden,  Advertising,  Chap.  III. 

MacMartin,  "Planning  an  Advertising  Campaign  for  a  Manu- 
facturer," Part  III. 

Modern  Business,  volume  ix,  pp.  275-317;  341-350. 

Shaw,  Approach  to  Business  Problems,  Chapter  II,  pp. 
9-12,  16. 

Advertising  and  Selling,  June,  1910,  p.  59.  "How  would  you 
like  to  be  the  Groceryman  V 

Printer's  Ink,  March  12,  1914,  p.  92,  "What  Agencies  are 
Worth";  April  30,  1914,  p.  37,  "Exclusive  Agencies"; 
December  18,  1913.  p.  34,  "Points  to  Consider  in  Choos- 
ing an  Agency." 


CHAPTER  XVI 

"new  type"  retailers 

In  the  struggle  for  control  of  consumer  demand  all  con- 
testants have  advocates.  Some  say  that  the  manufacturer 
is  in  the  advantageous  position,  if  he  makes  his  goods 
known  and  stimulates  inquiry  by  the  consumer  for  them 
through  advertising.  Others  say  that  the  jobber  can  block 
the  manufacturer's  way  to  market  and  tie  the  retailer  to 
himself  by  financial  obligations.  Still  others  claim  that  the 
strategic  moment  is  the  moment  of  sale,  that  the  retailer 
alone  is  in  "at  the  killing,"  that  he  meets  the  consumer 
face  to  face  and  can  suggest,  advise,  and  substitute. 

It  seems  clear  that,  whether  or  not  the  retailer  has  taken 
full  advantage  of  his  position,  he  has  the  opportunity  to 
direct  demand  to  a  very  substantial  extent.  Especially  is 
this  true  in  the  suburban  and  country  markets.  The  re- 
tailer can  become  a  potent  social  factor  in  the  community, 
according  as  he  realizes  the  possible  service  that  he  can  per- 
form. On  the  basis  of  his  methods,  the  retailer  will  fall 
into  one  or  the  other  of  two  classes:  the  one  is  called  the 
regular  or  old-line  retailer;  the  other  is  called  the  "new 
type"  retailer. 

205.  Regular  vs.  New  Type  Retailer. — The  regular  re- 
tailer is  the  one  who  keeps  his  place,  i.e.,  from  the  point 
of  view  of  the  jobber  and  manufacturer.  He  is  more  or 
less  passive,  doing  on  occasion  desultory  local  advertising, 
but  attending  strictly  to  a  retail  business.  Goods  come  to 
him  through  the  regular  channels  of  trade.  He  makes  his 
annual  or  semi-annual  trip  to  the  wholesale  center  for  the 

340 


"NEW  TYPE"  RETAILERS  341 

purchase  of  his  season 's  supply  of  goods ;  or  he  buys  from 
the  drummers,  or  traveling  salesmen,  who  visit  him.  In  a 
word,  he  remains  true  to  the  type  that  developed  with  the 
older  system  of  distribution. 

The  institution  through  which  the  regular  retailer  has 
functioned  most  typically  is  the  "general  store."  This  was 
the  frontier  retail  institution,  with  a  prototype  in  army 
trading  and  "company"  posts  of  pioneer  days.  The  gen- 
eral storekeeper  was  the  merchant  of  the  early  community. 
He  kept,  in  so  far  as  he  could,  what  the  community  needed, 
and  made  out  of  his  store  a  veritable  Pandora's  box.  As 
the  frontier  line  moved  on,  the  general  merchant  remained. 
His  tribe  multiplied  as  the  posts  grew  into  towns.  From 
the  primitive  carry-all  store,  which  was  likewise  a  social 
center,  there  developed  certain  specialty  stores,  such  as  the 
drug  store,  hardware  store,  dry-goods  store,  and  so  on. 
All  of  these  remained  regular  so  long  as  they  kept  within 
the  bounds  of  retailing. 

With  the  growth  of  trade  centers,  however,  new  func- 
tions were  assumed  by  those  retailers  who  possessed  ability 
and  saw  the  advantage  of  combining  other  distributive  func- 
tions with  retailing.  There  arose  a  group  of  merchant 
princes  in  retailing,  whose  courage,  daring,  originality,  and 
shrewd  judgment  brought  changes  into  the  old  system. 
These  new  business  leaders  have  organized  new  institutions, 
and  have  come  to  be  known  as  the  "new  type"  of  retailers. 
Their  methods  can  best  be  understood  through  a  study 
of  the  department  store,  the  mail-order  house,  the  chain 
store,  and  the  manufacturer's  branch.  Another  attempt 
to  combine  distributive  functions  is  found  in  the  coopera- 
tive store. 

206.  The  Department  Store. — "Woman  is  a  shopper" 
says  one  writer  on  business,  "hence,  the  department  store." 
By  this  he  meant  that  the  foundation  of  the  retail  estab- 
lishment known  generally  as  the  department  store  is  based 


342  MARKETING 

upon  shopping  lines  of  goods.  The  basic  commodity  is 
generally  accepted  to  be  textiles.  However,  whether  or  not 
that  may  be  true  is  uncertain,  the  records  at  present  are 
not  clear.  The  name  itself  is  derived  from  the  type  of  or- 
ganization. A  department  store  is  an  aggregation  of  de- 
partments, each  one,  up  to  a  certain  extent,  a  little  store 
within  itself.  If  the  textile  group  formed  the  original 
core  of  the  organization,  many  others  have  been  added 
from  time  to  time.  The  ideal  of  such  a  retail  store  is  to 
carry  everything  asked  for.  A  prospective  customer,  it  is 
claimed,  disappointed  too  often  will  not  return. 

Each  department  within  the  store  has  its  own  individual 
organization.  One  man,  who  is  generally  called  the  de- 
partment head,  is  responsible  for  the  activities  of  the 
given  department.  The  general  principle  in  the  direction  of 
department  stores  is  to  demand  that  each  department  must 
pay  for  itself,  that  each  department  must  obey  the  rules 
of  the  house  or  business  policies,  that  each  one  shall  be 
under  a  central  authority,  and  that  each  shall  work  in  har- 
mony for  the  common  good.  The  number  of  departments 
varies  greatly  in  different  stores.  In  general,  they  run 
from  20  to  250  departments. 

The  organization  within  each  department  is,  or  should 
be,  clearly  denned.  Each  one  has  its  individual  problem 
of  purchasing  and  of  selling.  For  each,  there  is  a  stock  plan 
under  the  direction  of  a  managing  head.  It  is  the  general 
custom  for  each  department  head  to  be  entrusted  with  a 
given  amount  of  capital  to  spend.  He  is  allowed  to  buy 
and  sell  with  as  large  a  degree  of  independence  as  is  prac- 
ticable. To  the  extent  of  this  independent  activity,  the  de- 
partment head  retains  the  functions  of  an  independent 
merchant.  His  judgment,  however,  must  run  along  the 
lines  set  by  the  general  manager.  The  terms  of  sale,  the 
percentage  of  gross  profit,  the  volume  of  business,  the 
amount  of  net  profit,  are  questions  for  the  central  manage- 


"NEW  TYPE"  RETAILERS  343 

ment  to  determine.  Orders  for  goods  are  usually  valid 
only  when  signed  by  a  member  of  the  firm  or  specially  desig- 
nated agent.  Individual  independence  within  each  depart- 
ment is,  therefore,  strictly  limited  by  the  central  manage- 
ment. 

With  the  rapid  development  of  the  department  store  it 
becomes  an  important  question  to  ask  what  goods  can  be 
concentrated  within  it.  Is  there  any  economic  limit  to  the 
extension  of  department  store  activities?  No  definite  an- 
swer can  at  this  time  be  given  to  such  a  question.  The 
so-called  "convenience"  lines  of  goods  are  the  largest  in 
this  type  of  retail  store,  and  it  is  said  that  such  goods 
make  up  half  the  total  business  of  the  rural  general  store. 
If  the  theory  of  the  department  store  is  correct,  namely, 
that  it  depends  primarily  upon  a  shopping  line  of  goods, 
the  conclusion  inevitably  follows  that  this  principle  will 
determine  the  extent  of  concentration  of  business  for  de- 
partment-store retailing. 

Many  department  stores  carry  groceries.  From  the 
point  of  view  of  the  consumer,  this  line  of  goods  depends 
for  its  economic  retailing  upon  (1)  quality  of  goods,  (2) 
ease  of  ordering,  (3)  promptness  in  delivery.  Groceries 
are  obviously  "convenience"  goods.  Hence,  on  the  basis 
of  principle,  groceries  are  extraneous  to  the  evolution  of 
the  department  store.  It  is  the  general  opinion  of  authori- 
ties that  department  stores  have  not  yet  made  a  great  suc- 
cess of  their  grocery  departments. 

Most  large  department  stores  carry  furniture.  This  line 
of  goods  is  bought  as  an  important  item  in  the  family 
budget.  There  is  usually  a  family  consultation  before  any 
extensive  purchase  is  made.  The  furniture  trade  is  to-day 
fairly  well  divided  between  special  furniture  stores  and 
department  stores.  On  the  theory  that  women  are  fond  of 
shopping  and  men  are  anti-shoppers,  this  division  would 
seem  to  be  a  natural  one.    Furthermore,  if  the  department 


344  MARKETING 

store  does  in  reality  depend  upon  the  opportunity  for 
shopping  which  women  demand,  furniture  can  never  be  con- 
trolled wholly  by  department  stores.  If,  however,  articles 
of  furniture  come  to  be  regarded  from  the  same  point  of 
view  as  textiles,  they  may  find  a  natural  place  in  the  de- 
partment store. 

There  is  also  a  jewelry  department  in  most  of  the  de- 
partment stores.  Usually  it  is  not  high-priced  jewelry  that 
is  to  be  found  in  such  retail  establishments.  This  is  due 
to  the  high  cost  of  such  goods  and  to  the  need  of  experts  in 
handling  them.  The  specialty  store  for  jewelry  has  a  dis- 
tinct advantage  here.  Low-priced  jewelry  seems  to  be 
firmly  fixed  in  the  department  store  and  small  jewelry 
stores  are  becoming  repair  shops.  It  is  predicted  that  de- 
partment stores  will  never  be  able  to  secure  the  trade  of 
the  high-grade  jewelry  stores. 

Several  lines  of  hardware  are  also  to  be  found  in  de- 
partment stores.  It  may  be  said  that  in  general  hardware 
is  the  kind  of  goods  which  men  purchase.  It  is  to  be  ob- 
served, also,  that  shelf  hardware  has  tended  to  remain  in 
specialty  stores.  Tinware  and  kitchen  utensils,  however, 
are  to  be  found  in  the  basements  of  most  department  stores. 
The  same  principles  apply  here  as  have  been  indicated  be- 
fore. If  there  is  a  change  in  method  of  purchase,  the  de- 
partment store  may  incorporate  more  and  more  hardware 
lines. 

Among  textile  goods,  there  is  a  line  which  may  be  called 
"men's  wear."  These  articles  will  prove  to  be  a  real  test 
of  the  principles  that  have  been  announced  as  underlying 
the  development  of  department  stores.  If  it  is  true  that 
men  dislike  big  stores  with  their  crowds,  if  it  is  true  that 
men  incline  to  buy  more  or  less  spontaneously  from  win- 
dow displays,  it  will  obviously  be  a  difficult  matter  to  con- 
centrate the  goods  which  they  purchase  in  a  department 
store.    Attention  has  been  called  to  the  fact  that  business 


"NEW  TYPE"  RETAILERS  345 

men  who  commute  back  and  forth  into  New  York  City  buy 
their  clothing  in  their  home  towns  more  frequently  than  the 
women  in  their  families. 

Business  habits  are  not  clearly  defined  and  are  never 
fixed  for  a  long  period  of  time.  Every  generalization, 
therefore,  must  be  qualified  for  the  sake  of  accuracy.  Ac- 
cording to  the  principles  announced  above,  however,  the 
department  store  can  concentrate  a  large  share  of  the 
shopping  lines  of  goods.  It  has  been  able  to  hold  its  own 
in  practically  all  lines  against  specialty  stores.  As  goods 
pass  from  the  convenience  or  emergency  group  into  the 
shopping  line,  they  will  be  more  fully  suited  for  depart- 
ment store  retailing.  It  is  also  obvious  that  many  goods 
will  be  carried  for  the  convenience  of  those  who  come  to 
shop.  Men  and  women  will  find  it  convenient  to  make 
purchases  of  other  things  besides  shopping  lines,  although 
they  may  not  visit  the  department  store  for  that  particu- 
lar purpose. 

The  advantages  which  the  department  store  claims  over 
the  regular  retailing  establishment  are  as  follows:  the  de- 
partment store  has  a  great  advantage  in  the  stock  plan 
which  it  can  develop — each  department  is  able  to  work  on 
its  specific  stock  plan ;  the  department  store  also  has  buying 
advantages;  it  has  advantages  in  operation  which  go  with 
large-scale  production ;  it  has  banking  advantages— a  large 
merchant  is  frequently  a  better  risk  than  a  small  merchant, 
as  he  usually  has  sufficient  capital  to  take  advantage  of  all 
the  discounts.  As  the  department  store  increases  in  size,  it 
may  assume  the  wholesale  function  and  buy  direct  from 
manufacturers.  This  gives  the  department  store  an  ad- 
vantage in  speed  of  turnover  of  its  goods.  The  range  in 
speed  of  turnover  in  cities  of  first  rank  throughout  the 
United  States  is  from  four  to  eight  times  per  year.  The 
department  store  claims  also  to  have  advertising  advan- 


346  MARKETING 

tages.  It  has  been  able  to  secure  advantage  from  bargain 
prices. 

This  type  of  retail  store  has  its  weakness  as  well  as  its 
strength.  There  is  no  longer  the  direct,  personal  contact 
between  management  and  salesmen.  The  manager-owner 
is  no  longer  to  be  found  where  the  department  store  has 
developed.  On  general  principles,  a  man  will  not  work 
for  others  as  effectively  as  for  himself.  The  chief  weak- 
ness of  the  department  store,  however,  is  in  the  basis  of 
competition.  Investigations  appear  to  show  that  in  gen- 
eral the  average  cost  of  doing  business  in  department  stores 
is  higher  than  in  small  stores.  The  program  has  been,  in 
the  past,  to  sell  more  goods  every  year,  but  inevitably  the 
time  comes  when  department-store  markets  begin  to  over- 
lap. 

When  department  store  competes  with  department  store, 
it  is  found  that  they  are  practically  equal  in  all  points  and 
must,  compete  on  the  basis  of  service  and  good  will.  To 
this  kind  of  competition  there  is  no  fixed  limit.  One  de- 
partment store  spends  five  per  cent  on  service  alone.  The 
rest  rooms,  the  delivery  service,  the  information  office,  the 
parcels  check-room,  pipe-organ  recitals,  etc.,  are  evidences 
of  this  competition  in  service.  Costs,  therefore,  increase 
from  year  to  year.    An  insidious  danger  lies  here. 

The  effect  of  the  department  store  upon  methods  of  re- 
tailing has  been  on  the  whole  good.  It  has  tended  to  sim- 
plify the  distributive  organization  for  handling  manu- 
factured goods.  It  has  weakened  the  position  and  has 
taken  over  the  services  of  the  wholesale  buyer.  It  has 
practically  revolutionized  the  retailing  business  through 
the  introduction  of  competition  in  service.  It  has, 
to  a  considerable  extent,  eliminated  the  element  of  person- 
ality in  retail  selling.  It  has  been  able  to  study  more  fully 
and  more  carefully  the  problem  of  retailing  and  has  in- 
troduced many  methods  of  saving.    In  order  to  keep  going 


"NEW  TYPE"  Rl'.TAILERS  347 

in  business,  the  regular  retailer  has  been  compelled  to 
modify  his  old-fashioned  and  wasteful  methods. 

The  future  of  the  department  store  is,  of  course,  an  un- 
solved riddle.  There  is  no  apparent  reason  why  it  should 
not  continue  to  prosper.  More  and  more  departments  are 
being  added  to  the  large  department  stores,  and  more  and 
more  goods  are  passing  into  shopping  lines.  This  retail 
establishment  has  become  a  vast  emporium  for  carrying 
goods  of  all  classes  and  prices.  While  it  is  claimed  that 
no  store  can  appeal  successfully  to  more  than  two  grades  of 
purchasers,  it  is  nevertheless  an  observable  fact  that  the 
"shawl"  trade  and  the  limousine  trade  are  both  served  by 
many  department  stores.  Apparently,  department  stores 
have  risen  to  meet  an  economic  need.  In  general,  it  seems 
probable  that  they  will  endure,  unless  they  destroy  one  an- 
other by  too  expensive  service. 

The  department-store  type  of  retail  establishment  is  not 
confined  to  the  United  States.  A  famous  Paris  store  had 
developed  long  before  the  first  department  stores  appeared 
in  this  country.  It  is  claimed  also  that  this  type  of  store 
has  found  immediate  popularity  in  China.  "The  Chinese 
of  to-day  are  fond  of  novelties.  That  is  one  important  rea- 
son why  the  Sincere  Company  has  been  so  successful  in 
Canton  and  Shanghai.  Even  more  people  go  to  the  de- 
partment store  singly  or  in  groups  day  after  day  than  go 
to  the  amusement  houses,  making  purchases  of  possibly  not 
needed  articles.  The  poor  and  rich  men  and  women  find 
it  a  meeting-place,  elbowing  and  shouldering  together.  It 
is  a  sign  of  the  Chinese  becoming  more  democratic."  x 

207.  The  Chain  Store. — The  chain  store  as  a  retail  estab- 
lishment is  closely  related  to  the  department  store  in  or- 
ganization. If  the  "little  store  within  a  store"  is  taken 
out  and  put  into  another  section  of  the  city  or  another  city, 

1  Commerce  Beports,  Januar7  11,  1917,  p.  888. 


348  IIARKETING 

there  is  the  beginning  of  a  chain.  Essentially  the  chain 
store  is  a  department  store  split  up  into  units.  It  is  to  be 
understood,  however,  that  this  applies  only  to  organiza- 
tion. All  stores  in  the  chain  carry  practically  the  same 
line  of  goods. 

Chain  stores  fall  naturally  into  three  groups.  There 
are  the  manufacturers'  chains,  which  are  called  manufac- 
turers' branch  stores.  There  are  also  the  jobbers'  chains, 
where  the  chain  store  idea  has  been  applied  to  the  job- 
bing business.  There  is  in  the  third  place  the  retailers' 
chain.  This  is  by  far  the  most  important  and  is  the  one 
which  will  be  discussed  here  in  detail. 

The  chain  store  aims  to  secure  all  of  the  buying  ad- 
vantages of  the  department  store  and  all  of  the  selling  ad- 
vantages of  the  small  retail  store.  In  contrast  with  the 
department  store,  however,  where  the  basis  is  a  shopping 
line  of  goods,  the  chain  store  relies  upon  convenience  and 
emergency  goods.  As  has  been  said  in  the  analysis  of  emer- 
gency goods,  the  main  purpose  in  retailing  is  to  have  the 
right  thing  in  the  right  place  and  in  the  right  quantity  at 
the  right  time.  What  the  consumer  wants  he  wants  quickly. 
The  success  of  the  retail  store,  therefore,  which  depends 
upon  convenience  or  emergency  goods,  is  largely  a  prob- 
lem of  location.  The  chain  store  claims  its  greatest  success 
in  adjusting  itself  to  the  requirements  of  this  problem. 

Chain  stores  carry  many  different  types  of  goods.  There 
are  a  number  of  chains  which  carry  groceries.  There  are 
at  least  four  extensive  chain  systems  handling  notions  and 
generally  known  as  ' '  five-  and  ten-cent  stores. ' '  There  are 
tobacco  and  cigar  store  chains.  There  are  chain  stores 
handling  shoes,  and  there  has  recently  been  added  an  ex- 
tensive system  of  chain  stores  in  hardware.  One  analysis 
of  experience  with  chain-store  systems  reaches  the  conclu- 
sion that  they  work  best  in  emergency  goods,  less  well  in 
convenience  goods,  and  with  difficulty  in  shopping  lines. 


"NEW  TYPE"  RETAILERS  349 

The  chain  store  has  dealt  successfully  with  groceries, 
drugs,  and  cigars.  Here  it  has  eliminated  the  wholesaler 
and  in  many  cases  has  absorbed  likewise  the  functions  of 
producer.  An  important  characteristic  of  the  chain-store 
system  is  that  an  organization  can  retain  direct  control 
of  goods  from  source  to  consumer.  It  has  been  associated 
in  the  past  with  various  methods  of  price  cutting  and  other 
cut-rate  methods.  Practices  of  this  kind  have  aroused 
manufacturers,  jobbers,  and  the  regular  retailers.  Even 
the  suspicions  of  the  consumer  have  been  raised  at  times, 
but  the  desire  for  a  bargain  is  in  many  cases  strong  enough 
to  overcome  this  suspicion.  In  purchasing  supplies,  the 
chain  stores  have  come  with  large  orders  and  a  demand 
for  special  rates.  It  is  probable  that  they  can  match  the 
department  stores  in  their  buying  advantages  and  in  their 
selling  advantages. 

Specifically,  the  advantages  which  the  chain  store  claims 
are  (1)  large-scale  buying,  (2)  a  possibility  of  combining 
manufacturing,  wholesaling,  and  retailing,  (3)  a  standardi- 
zation of  equipment  and  of  selling  methods,  (4)  the  ability 
to  shift  stock  from  one  section  of  the  country  to  another, 
in  order  to  adjust  it  to  market  demand. 

There  are  several  varieties  of  the  chain-store  system. 
These  stores  which  emphasize  bargain  prices  are  usually 
called  economy  stores.  Such  retail  establishments  exist  in 
the  grocery  trade  especially  and,  to  a  certain  extent,  in  tea 
and  coffee  and  low-priced  notions,  or  convenience  goods. 
One  line  carrying  groceries  has  now  practically  3,000  stores 
located  in  different  parts  of  the  country.  There  has  been 
during  the  period  of  increasing  prices  a  very  rapid  develop- 
ment of  these  stores.  It  may  be  said  in  general  that  those 
stores  handling  staple  goods  where  price  is  the  determining 
factor  flourish  best  in  hard  times  or  in  periods  of  increasing 
prices.  The  general  principle  of  such  chain  stores  is  to  re- 
duce operating  costs  by  reducing  service  to  a  minimum. 


350  MARKETING 

The  type  of  chain  store  usually  known  as  the  five-  and 
ten-cent  store  has  had  a  most  interesting  development.  One 
of  these  chains,  which  has  stores  in  all  parts  of  the  country 
and  is  to-day  probably  the  largest,  was  established  in  Feb- 
ruary, 1879.  This  was  the  first  attempt  at  the  chain-store 
system.  In  the  early  years,  these  stores  were  a  success,  but 
later  met  with  disaster.  After  struggling  along  for  five 
years,  the  idea  began  to  be  accepted  and  growth  from  that 
time  on  has  been  rapid.  From  a  single  store  in  1879,  this 
system  has  grown  to  781  stores  in  the  United  States,  Can- 
ada, and  England. 

In  this  type  of  retail  establishment,  location  is  undoubt- 
edly the  next  important  item  to  that  of  price.  It  may  be 
said,  in  general,  that  the  location  of  the  five-  and  ten-cent 
store  to-day  is  determined  by  the  following  considerations. 
The  experience  with  such  stores  has  shown  that  ninety  per 
cent  of  their  trade  has  been  with  women.  To-day,  there- 
fore, such  stores  are  located  on  what  is  known  as  the  shop- 
pers' side  of  the  street.  Some  others  are  established  where 
rent  is  cheaper,  regardless  of  convenience  of  customers. 
Other  factors  to  be  considered  in  the  location  of  chain  stores 
are  the  growth  of  the  city,  and  the  securing  of  conspicuous 
corners  in  the  cities  already  developed.  The  five-  and  ten-cent 
store  seeks  a  location  as  near  as  convenient  to  a  depart- 
ment store.  In  this  way,  it  gets  the  benefit  of  advertising 
which  draws  the  crowds  to  that  place.  A  theater,  a  drug 
store,  or  other  attractive  store  can  serve  the  same  purpose. 
No  location  is  sought  near  saloons,  banks,  or  places  where 
men  alone  congregate.  Traffic  conditions  are  also  con- 
sidered in  the  location  of  these  stores.  In  cities  with  large 
interurban  railroad  systems,  a  location  is  made,  if  possible, 
at  the  connecting  point.  The  experience  from  these  stores 
has  shown  that  an  admirable  location  may  be  found  on 
cross  streets.  In  this  case,  it  is  advisable  to  have  the  store 
located  halfway  between  two  cross  streets.    The  important 


"NEW  TYPE"  RETAILERS  351 

consideration  is  always  where  people  who  are  prospective 
customers  are  likely  to  go. 

The  stock  problem  of  the  five-  and  ten-cent  store  is  al- 
ways a  difficult  one.  The  study  of  this  problem,  however, 
has  demonstrated  the  following  facts :  that  about  92  per 
cent  of  the  stock  is  made  up  of  every-day  necessities;  that 
about  4  per  cent  is  made  up  of  luxuries;  that  candy  and 
jewelry  novelties  make  2  per  cent  more;  and  that  fads 
and  souvenirs  constitute  2  per  cent.  Besides  these  articles 
which  go  into  the  regular  stock  plan  there  is  always  an 
opportunity  left  for  experimental  goods.  These  stores  in- 
clude as  many  as  forty-eight  different  lines  of  goods.  The 
ones  that  have  recently  been  added  are  groceries,  auto  parts, 
a  flower  department,  a  photograph  gallery,  a  soda  foun- 
tain, and  a  restaurant.  It  is  claimed  that  the  limit  of  ex- 
pansion has  apparently  been  reached,  although  some  chains 
consider  adding  a  circulating  library.  Expansion  must, 
therefore,  come  in  higher  prices  rather  than  in  more  lines. 

In  carrying  on  this  type  of  chain  store  with  profit,  it  is 
claimed  that  there  cannot  be  less  than  six  turnovers  of 
goods  within  a  year.  Successful  operation  demands  also 
an  average  gross  profit  of  40  per  cent. 

208.  The  Mail-Order  House. — The  department  store 
illustrates  the  retailer  who  seeks  advantage  of  large-scale 
buying  and  large-scale  selling,  especially  in  shopping  lines. 
The  chain  store  illustrates  the  retailer  aiming  at  large- 
scale  buying  and  small-scale  selling,  especially  in  emer- 
gency and  convenience  goods.  The  mail-order  house  or  the 
catalogue  house  illustrates  another  attempt  to  divert  from 
their  regular  channels  goods  that  are  on  their  way  to  the 
consumer.  It  is  to  be  remembered  in  this  connection  that 
no  matter  what  the  type  of  retail  establishment,  the  same 
functions  are  to  be  performed.  The  department  store  then, 
beginning  as  the  retailer,  has  reached  out  to  incorporate 
the  wholesaler's  functions  and  is  to-day  extending  even 


352  MARKETING 

to  the  factory  to  control  or  own  it.  In  the  same  way,  the 
chain  store  has  often  found  it  necessary  to  do  manufac- 
turing and  wholesaling  as  well  as  retailing.  The  experi- 
ence of  the  mail-order  house  is  the  same.  It  started  out 
to  be  a  retailer  only,  but  now  the  largest  mail-order  houses 
do  wholesaling  and  manufacturing  as  well. 

The  principle  upon  which  the  mail-order  house  has  de- 
veloped has  been  to  buy  direct  wherever  possible  and  to  sell 
direct  to  the  consumer  always.  Experience  has  shown  that 
the  mail-order  house  is  compelled  to  re-distribute  profits 
rather  than  to  reduce  substantially  the  cost  of  distribution. 
Operating  expenses,  however,  for  retailing  in  this  kind 
of  establishment  fall  below  those  of  the  department  store 
and  the  chain  store. 

The  mail-order  house  eliminates  the  sales  force.  It  sub- 
stitutes for  salesmen  a  catalogue  which  may  be  either  gen- 
eral or  special  in  type.  This  catalogue  is  the  only  appeal 
which  the  mail-order  house  makes.  This  appeal  is  on  the 
basis  of  prices.  The  principal  argument  by  the  mail-order 
house  is  a  price  lower  than  that  asked  in  regular  retail 
stores.  Until  recently,  the  mail-order  house  catalogue  car- 
ried price  comparisons  showing  that  the  price  of  their  goods 
was  lower  than  that  of  the  regular  retailers. 

Usually  the  terms  offered  by  the  mail-order  house  are  a 
cash  payment  with  the  order.  Some  such  retail  establish- 
ments, however,  have  always  extended  credit.  The  most 
distinctive  feature  is  the  guarantee  which  all  the  large 
mail-order  houses  now  make  to  the  consumer.  One  concern 
offers  in  large  type  on  the  outside  of  its  catalogue :  ' '  We 
guarantee  absolute  satisfaction.  Promptly  return  to  us 
at  our  expense  any  unsatisfactory  purchase.  We  will  then 
either  exchange  it  for  what  you  want,  or  return  the  full 
amount  you  have  paid  together  with  transportation 
charges.' '  It  is  said  that  a  guarantee  of  this  kind  issued 
by  a  large  house  has  a  peculiar  psychological  effect.    It  not 


"NEW  TYPE"  RETAILERS  353 

only  promotes  confidence  in  the  statements  made  in  the 
catalogue,  but  it  also  promotes  confidence  in  the  goods 
themselves,  even  after  they  have  come  to  the  customer. 
The  guarantee  therefore  tends  to  prevent  returns  and  ex- 
changes rather  than  to  increase  them. 

Mail-order  houses  have  always  been  notoriously  close 
buyers.  Their  purchases  have  been  made  in  large  quanti- 
ties, and  usually  have  increased  from  year  to  year.  With 
each  increase  in  purchases  better  terms  were  asked  by  the 
mail-order  houses.  When  they  have  become  the  dominant 
purchaser  of  any  manufacturer,  they  can  then  largely  de- 
termine his  success.  In  this  way  they  have  been  able  to 
secure  on  advantageous  terms  manufacturing  businesses 
that  are  already  established.  There  seems  to  be  no  essen- 
tial reason,  however,  why  mail-order  houses  should  have 
any  buying  advantages  superior  to  the  department  store  and 
the  chain  store.  Their  peculiar  problem  in  buying  is  that 
their  catalogues  must  be  made  up  at  least  six  months  ahead 
of  time  and  goods  must  be  on  hand  to  meet  instantly  any 
inquiry  that  comes  in  response.  In  a  period  of  fluctuating 
prices,  the  buying  problem  is  peculiarly  complicated. 

Mail-order  houses  carry  many  different  kinds  of  goods. 
The  principle  among  the  largest  has  been  to  charge  against 
each  department  a  sum  proportionate  to  the  space  occu- 
pied by  its  commodities  in  the  catalogue.  When  an  article 
does  not  pay  its  way,  it  is  eliminated.  The  variety  of  goods 
in  mail-order  houses  in  the  face  of  this  principle  has  been 
constantly  increasing.  Articles  that  a  few  years  ago  would 
have  seemed  impossible  to  sell  on  description  at  long  range 
appear  to  be  fixed  permanently  in  these  catalogues.  These 
include  wagons,  buggies,  gas  engines,  cream  separators, 
phonographs,  and  dwelling-houses.  Apparently  shopping 
lines  of  goods  would  not  be  suitable  for  mail-order  houses 
to  handle.  Nevertheless,  they  have  not  proved  to  be  an 
insuperable  barrier.     The  essential  limitations  as  to  the 


354  MARKETING 

variety  of  goods  which  mail-order  houses  can  handle  are  to 
be  found  in  the  possibility  of  describing  accurately  and 
of  standardizing  the  commodities.  A  satisfactory  idea  of 
the  character  and  quality  of  each  article  must  be  conveyed 
to  the  prospective  customer.  It  is  also  necessary  to  estab- 
lish a  standard  for  commodities,  in  order  that  a  guarantee 
may  be  made.  Within  these  broad  limits,  there  is  not  to- 
day any  end  to  the  kind  of  goods  which  can  be  sold  through 
catalogues. 

Mail-order  houses  as  retail  establishments  have  certain 
inevitable  limitations.  It  is  difficult  for  commodities  to  be 
made  attractive  in  appearance  through  pictures  in  the 
catalogues.  There  is  no  chance  for  the  customer  to  inspect 
the  goods  before  purchasing.  City  buyers  can  get  more 
service  from  other  types  of  retailers.  Also  the  average 
customer  has  difficulty  in  visualizing  an  article  from  a  mere 
description.  Furthermore,  mail-order  houses  cannot  hope 
to  compete  with  other  types  of  retailers  in  offering  credit. 

The  advantages  claimed  by  the  mail-order  houses  over  the 
small  local  retail  stores  are  as  follows :  the  mail-order  method 
of  advertising  is  far  superior  and  much  more  effective  than 
that  of  the  average  local  retailer ;  the  extreme  care  used  in 
descriptions  and  in  pictures  is  also  to  their  advantage  in 
this  regard;  the  large  mail-order  house  is  enabled  to  offer 
through  its  catalogue  a  very  wide  variety  of  goods.  In 
this  respect  the  small-town  merchant  cannot  compete.  More- 
over there  is  the  feeling  on  the  part  of  the  average  cus- 
tomer in  rural  districts  that  goods  bought  from  the  large 
trade  centers  are  of  superior  quality. 

The  large  mail-order  house,  furthermore,  through  its 
financial  power  and  its  ability  to  market  immense  quanti- 
ties of  goods,  is  able  to  buy  much  of  its  merchandise  at 
inside  prices  which  often  are  so  low  that  the  mail-order 
house  may.  undersell  its  rural  competitors  and  still  make 
a  good  profit.     Like  the  department  store  and  the  chain 


"NEW  TYPE"  RETAILERS  355 

store,  the  mail-order  house  has  been  a  potent  factor  in 
toning  up  retail  business.  Its  effect  has  been  felt  more 
strongly  in  the  country  retail  business  than  in  the  cities. 
There  is  no  doubt  that  the  mail-order  methods  of  doing 
business  have  done  much  to  tone  up  the  country  retail 
trade.  These  catalogue  houses  have  also  educated  the  coun- 
try trade  to  greater  consumption.  They  have  demonstrated 
the  possibility  of  selling  all  sorts  of  goods  at  long  range  and 
by  description. 

The  essential  characteristics  of  mail-order  business  are  a 
standardization  of  goods,  an  iron-clad  guarantee  of  con- 
sumer satisfaction,  the  payment  of  transportation  and  de- 
livery charges  by  the  customer,  and  sales  made  through  the 
mail.  Many  large  stores  of  the  department-store  type  and 
of  the  specialty-store  type  do  some  mail-order  business. 
Their  main  volume  of  trade,  however,  depends  upon  cus- 
tomers who  come  to  their  stores  to  inspect  the  goods  and 
to  buy  across  the  counters. 

The  future  of  the  mail-order  business  appears  to  be  one 
of  prosperous  development.  A  recent  writer  on  this  type 
of  retail  business  has  declared :  "To  me,  the  value  of  the 
mail-order  method  of  distribution  seems  so  great  and  so 
easily  demonstrable  that  I  refuse  to  believe  that  it  will  not 
appeal  to  the  great  majority  of  the  American  people  who, 
whether  they  live  in  the  city  or  the  country,  are  daily 
becoming  more  intelligent  in  their  study  of  life's  prob- 
lems."2 

209.  The  Manufacturer's  Branch  Store. — The  special 
type  of  the  chain  store  established  by  the  manufacturer 
is  known  as  the  manufacturer's  branch  store.  The  general 
type  of  chain  store  is  a  retail  establishment  in  origin.  This 
type  is  an  extension  of  the  control  of  the  manufacturer 
over  the  distributive  process.    He  is  now  a  manufacturer, 


JThe  Outlook,  June,  1916. 


356  MARKETING 

a  wholesaler,  and  a  retailer.  The  kinds  of  goods  adapted 
to  this  method  of  retailing  are  illustrated  by  sewing  ma- 
chines, cash  registers,  farm  machinery,  typewriters,  and 
automobiles.  The  policy  which  governs  the  organization  of 
this  store  is  one  to  control  the  commodity  from  the  manu- 
facturing plant  to  the  consumer.  It  is  also  clear  that  con- 
nected with  the  commodities  named  above,  there  is  need 
for  expert  sales  agents  who  can  educate  the  consumer  in  the 
character,  the  methods  of  setting  up,  and  the  operation  of 
machines. 

It  is  not  essential,  however,  with  such  a  system  of  re- 
tailing, to  handle  commodities  of  this  character.  There  are 
manufacturers'  branch  stores  which  carry  shoes.  Some 
of  the  well-known  brands  of  shoes  are  distributed  in  this 
way.  Clothing  of  certain  brands,  also,  is  handled  by  a 
series  of  manufacturers'  branch  stores.  The  two  chief 
characteristics  of  these  commodities  are  special  service  and 
special  risk. 

The  advantages  claimed  for  the  manufacturers'  branch 
stores  are:  direct  control  of  goods  from  the  plant  to  the 
consumer;  ability  to  shift  stocks  of  goods  from  one  sec- 
tion to  another;  a  direct  channel  for  securing  knowledge 
of  consumer  demand ;  and  a  standardization  of  equipment. 
The  difficulties  in  the  successful  operation  of  such  a  sys- 
tem of  distribution  are  the  same  as  those  connected  with 
chain  stores.  It  is  hard  to  find  branch  managers  who  can 
run  the  business  successfully  and  whose  judgment  and  ac- 
tivities can  be  controlled  by  the  central  management. 

There  are  no  problems  to  be  found  in  the  manufacturers ' 
branch  stores  which  are  fundamentally  different  from 
those  that  have  already  been  discussed  in  the  chain-store 
system.  This  method  of  distribution  has  not  developed 
rapidly  and  there  is  no  prospect  that  it  will  become,  in 
any  sense,  a  dominant  factor.  Some  manufacturers  have 
achieved  success  with  this  method,  but  others  have  reached 


"NEW  TYPE"  RETAILERS  357 

equal  success  by  other  methods.  Apparently  it  has  no 
permanent  superior  features. 

210.  Cooperative  Stores. — Another  method  of  simplify- 
ing the  distributive  organization  is  through  cooperative  ef- 
fort. The  most  successful  experiment  in  this  method  is 
found  in  the  cooperative  buying  and  selling  of  citrus 
fruits.  It  is  interesting  to  note  in  this  connection  that 
the  California  Fruit  Growers'  Association  has  undertaken 
to  sell  its  products  by  the  same  methods  that  are  used  in 
the  selling  of  manufactured  goods.  They  have  standard- 
ized their  products  and  they  have  identified  them  with  trade 
marks  in  the  same  way  that  manufacturers  have  done  with 
their  goods. 

In  general,  cooperative  effort  has  not  been  a  decided 
success  in  the  United  States.  The  essential  difficulty  has 
always  been  to  secure  efficient  managerial  help  for  the  co- 
operative stores.  In  certain  localities  where  there  is  a 
clearly  defined  social  group,  the  cooperative  retail  store 
has  been  a  success.  For  the  most  part,  however,  the  co- 
operative organizations  have  not  been  able  to  compete  in 
the  open  market  with  other  retail  establishments. 

In  a  recent  report  made  by  the  Department  of  Agricul- 
ture on  the  success  of  typical  cooperative  stores  in  the 
United  States,  the  following  conclusion  was  reached: 

Owing  to  the  fact  that  the  enactment  of  cooperative  laws  in 
the  different  States  is  a  comparatively  recent  movement,  a  large 
proportion  of  the  stores  examined  were  originally  established 
under  the  ordinary  corporation  laws.  Most  of  them,  however, 
are  now  organized  under  cooperative  laws.  At  the  time  of  this 
survey  such  laws  had  been  enacted  by  30  States,  including  all 
of  the  States  covered  by  this  study.  Thirty-two  out  of  forty- 
two  of  the  stores  reporting  on  questions  were  then  organized 
under  special  cooperative  laws.  Those  which  still  retained  the 
corporate  form  of  organization  adhered  to  certain  cooperative 
principles  which  were  made  a  matter  of  agreement  between  the 


358  MARKETING 

members  through  their  constitution  and  by-laws.  For  example, 
40  of  the  stores  had  adopted  the  principle  of  1  man,  1  vote; 
while  5  of  them  adhered  to  the  plan  of  voting  according  to 
investment.  It  was  noticed,  however,  that  in  the  older  asso- 
ciations established  under  the  corporate  law  there  was  a  tendency 
for  the  stock  to  pass  into  a  few  hands,  and  in  several  of  these 
cases  the  store  was  cooperative  only  in  name. 

Although  the  figures  were  not  conclusive,  nor  sufficient  for 
tabular  presentation,  they  seemed  to  bear  out  the  opinion  of 
many  of  the  managers  that  a  cooperative  store  is  apt  to  be  more 
successful  in  a  community  which  is  made  up  of  people  of  one 
nationality.  Similarly,  in  industrial  communities,  it  was  found 
that  stores  are  more  successful  where  a  large  percentage  of 
the  membership  is  of  the  same  occupation;  and  at  least  one 
ease  was  observed  in  which  common  church  affiliation  is  the 
basis  of  successful  operation. 

The  membership  ranges  from  1,600  to  30,  while  the  average 
for  all  the  stores  surveyed  was  228.  Although  there  were  some 
notable  exceptions,  as  a  general  rule  it  was  found  that  the 
success  of  the  stores  was  almost  in  direct  proportion  to  the 
membership.  This  may  be  due  to  the  fact  that  the  well- 
managed  store  usually  has  little  difficulty  in  increasing  its 
membership,  while  the  poorly  managed  store  soon  loses  the 
support  of  the  members  with  which  it  begins  operation.  .  .  . 
The  causes  of  failure,  it  is  evident,  are  largely  the  opposite 
of  those  conditions  which  make  for  success.  The  converse  of 
the  safeguards  for  success  would  be  (1)  lack  of  leadership; 
(2)  poor  management;  (3)  unfavorable  environment;  and 
(4)  lack  of  proper  legal  precautions.  .  .  .  Briefly  stated,  the 
conditions  of  success  may  be  summarized  under  the  headings: 
(1)  leadership;  (2)  capable  management;  (3)  favorable  environ- 
ment; (4)  adequate  legal  safeguards.3 

211.  Cooperative  Buying. — An  attempt  to  secure  the 
advantages  of  cooperative  effort  is  to  be  found  in  organi- 
zations of  retail  merchants  who  have  combined  for  ad- 

8  U.  S.  Department  of  Agriculture,  Bulletin  No.  394. 


''NEW  TYPE"  RETAILERS  359 

vantages  of  large-scale  buying.  In  one  town  in  Iowa,  for 
example,  there  are  500  merchants  who  compose  the  Retail 
Commercial  Union  and  who  are  backed  up  with  the  com- 
bined annual  buying  power  of  $40,000,000.  The  plan  of 
this  organization  is  to  place  large  orders  at  one  time  with 
manufacturers.  It  claims  that  exceptional  price  advan- 
tages are  certain  when  purchases  amount  to  more  than  five 
hundred  times  that  of  a  single  store.  No  doubt  such  com- 
bined purchasing  gives  a  distinct  advantage  to  the  re- 
tailer. 

212.  Conclusion. — These  are  the  types  of  retail  methods 
that  have  developed  during  recent  years  in  the  distrib- 
utive organization.  The  power  of  the  department  store, 
the  mail-order  house,  and  the  chain  store  has  become  suffi- 
ciently great  to  make  them  a  potent  factor  in  distribu- 
tion. They  are  to-day  undoubtedly  the  leaders  in  business 
methods  in  retailing  manufactured  goods.  In  many  re- 
spects they  have  taken  advantage  of  large-scale  organi- 
zation, of  reducing  costs,  and  of  controlling  the  course  of 
commodities. 

It  is  the  struggle  between  these  great  retailers,  the  large 
jobbers,  and  the  large  manufacturers  that  is  the  deter- 
mining factor  in  the  shaping  of  a  new  type  of  distribution. 
They  all  have  ample  financial  backing,  they  are  all  able 
to  appeal  through  national  advertising  to  the  consumer. 
They  have  all  identified  the  goods  which  they  handle  by 
trade-marks  and  trade  names.  They  have  likewise  endeav- 
ored to  absorb  all  the  functions  of  manufacturer  and  dis- 
tributor. The  character  of  the  future  distributive  organi- 
zation will  largely  be  determined  by  these  business  men. 

Suggestions  for  Study 

The  student  should,  at  this  point,  study  the  type  of  re- 
tailer who  handles  the  commodity  he  is  investigating.  The 
following  topics  will  serve  for  classroom  discussion : 


360  MARKETING 

The  Department  Store 

1.  The  origin  of  the  department  store. 

2.  The  rise  of  the  department  store. 

3.  The  oi'ganization  of  the  department  store. 

4.  The  alleged  economic  advantages  of  the  department  store. 

5.  The  limitations  of  the  department  store. 

6.  The  future  of  the  department  store. 

The  Chain  Store 

1.  Growth  and  development  of  the  chain  store. 

2.  The  organization  of  the  chain  store. 

3.  Its  economic  advantages. 

4.  Its  future. 

The  Mail-Order  House 

1.  The  origin  of  the  mail-order  house. 

2.  Economic  reasons  for  its  success. 

3.  The  mailing  list. 

4.  The  catalogue. 

5.  The  mail-order  house  and  distribution. 

6.  The  mail-order  house  and  the  rural  store. 

7.  The  mail-order  house  and  the  city  trade. 

8.  Credit  problems  of  the  mail-order  house. 

The  Cooperative  Store 

1.  The  economic  claims  for  the  cooperative  store. 

2.  Cooperation  and  American  business  men. 

3.  Organization  of  the  cooperative  movement. 

4.  The  future  of  cooperation. 

Readings: 

Nystrom,  Economics  of  Retailing,  Chaps.  XII,  XIII,  XIV. 
Fisk,  Retail  Selling,  pp.  24-26. 

Cherington,  Advertising  as  a  Business  Force,  pp.  158-204. 
Selling  Forces,  pp.  103-132. 


"NEW  TYPE"  RETAILERS  361 

Wanamaker,  Golden  Book  of  Wanamaker  Stores,  pp.  133-181. 

Printer's  Ink,  1913:  April  17,  p.  12;  November  13,  p.  41 
1914:  June  4,  p.  45;  June  11,  p.  12;  June  18,  p.  85 
July  9,  p.  3;  August  6,  p.  60;  September  7,  p.  23  and  63 
October  8,  p.  36;  October  29,  p.  72;  November  5,  p.  58. 

Outlook,  January  7,  1916,  p.  227. 

Mahin,  Advertising,  Chap.  XIV. 

De  Weese,  Practical  Publicity,,  pp.  118-125. 

Annals    of   the   American    Academy    of   Political   and   Social 
Science,  vol.  1,  pp.  223-39. 

U.  S.  Department  of  Agriculture,  Bulletins  No.  394  and  301. 


CHAPTER  XVII 


BUSINESS  POLICIES 


213.  What  the  Business  Policy  Is.— The  skill,  intelli- 
gence, and  individuality  of  the  business  man  are  nowhere 
shown  more  clearly  than  in  the  rules,  regulations,  and  poli- 
cies which  he  formulates  for  his  own  business.  A  "house  pol- 
icy" is,  therefore,  of  prime  consideration.  A  business 
may  become  distinctive  as  readily  for  its  policy  as  for  the 
character  of  the  goods  it  handles.  Within  the  policy  of  a 
business  is  included  the  entire  scope  of  the  relationship  be- 
tween the  maker  of  the  goods  and  the  buyer  of  the  goods, 
and  between  the  handler  of  the  goods  and  his  customers. 

Among  the  constituent  problems  involved  in  a  considera- 
tion of  a  business  policy  are  the  house,  or  store,  policy, 
the  price  policies,  the  problem  of  credit  and  discounts,  and 
the  general  business  practices.  More  specifically,  there 
are  the  problems  of  a  general  price  policy,  of  calculating 
percentage  mark-up  of  price,  of  price  maintenance,  of 
credits  and  discounts,  and  of  competitive  practices.  Be- 
sides these  there  are  the  subtler  phases  of  human  relation- 
ship, such  as  rules  of  courtesy,  "store  atmosphere,"  guar- 
antee of  goods,  money  refund  on  purchases,  the  develop- 
ment of  personal  relationship,  and  so  on.  These  latter, 
however,  are  as  much  within  the  realm  of  psychology  as  of 
economics.  A  course  in  salesmanship  would  emphasize 
them. 

214.  The  House  or  Store  Policy. — Every  store  develops 
to  a  greater  or  less  extent  a  code  of  practices.  These  deal 
with  the  employment  relationship  and  the  sales  relationship. 

362 


BUSINESS  POLICIES  3G3 

They  are  a  crystallization  of  the  integrity  and  honest  deal- 
ing of  the  management.  The  new  policy  introduced  by 
John  Wanamaker  that  the  customer  must  be  satisfied,  or 
that  of  the  house  of  Marshall  Field  which  holds  that  "the 
customer  is  always  right,"  illustrate  the  significance  of  a 
house  policy. 

As  related  to  the  selling  question,  the  house,  or  store, 
policy  becomes  a  merchandising  policy.  It  directs  the  ex- 
tension of  credit  to  customers,  the  service  items  of  delivery, 
rest-rooms,  courtesy,  inspection  and  return  of  goods,  and 
so  on.  In  it  are  involved  economic  considerations,  psycho- 
logical considerations  and  social  considerations. 

There  is  also  an  ethical  phase  to  be  considered  in  the  es- 
tablishing of  business  policies.  There  is  the  practical  con- 
sideration as  to  whether  or  not  the  merchant  is  to  put  into 
practice  the  old  adage  that  honesty  is  the  best  policy. 
In  business,  generally,  a  new  word  has  been  introduced  into 
common  usage  for  the  purpose  of  expressing  the  new  spirit 
that  is  entering  business  practice.  This  new  word  is  ' '  serv- 
ice" and  includes  a  consideration  of  the  merchant's  duty 
to  the  community  which  he  serves.  In  every  social  group, 
economic  problems  are  tinctured  with  social  problems. 
"What  the  merchant  gives  in  return  for  what  he  gets  from 
the  community  is  an  important  question.  The  mail-order 
house  and  many  of  the  large  retail  establishments  have  won 
for  themselves  the  reputation  of  unquestioned  integrity. 
They  have  done  this  by  dealing  fairly  with  their  customers 
and  by  being  willing  to  correct  all  mistakes.  To  be  known 
as  a  reliable  firm  is  an  important  asset  for  the  merchant. 

As  a  part  of  the  business  policy,  there  is  the  question  of 
offering  a  guarantee  as  to  the  quality  and  quantity  of  the 
commodities  sold.  This  guarantee  means  that  the  dealer 
is  willing  to  stand  back  of  every  claim  and  every  descrip- 
tion regarding  the  commodities  which  he  handles.  The  in- 
troduction of  a  guarantee  into  merchandising  is  of  consid- 


3G4  MARKETING 

erablo  significance.  It  is  reflected  in  the  character  of  the 
goods  which  the  merchant  handles,  and  it  is  an  addition 
to  his  responsibility.  It  affects  inevitably,  also,  the  meth- 
ods of  advertising  and  of  ' '  puffing ' '  his  goods.  On  the  other 
hand,  there  is  the  element  of  human  nature  connected  with 
the  guarantee.  It  is  possible,  under  such  a  policy,  for  the 
unscrupulous  customer  to  take  advantage  of  the  merchant. 
The  trend  of  experience  on  the  guarantee  of  goods  has 
been,  however,  that  the  customer  responds  readily  to  such 
methods  of  dealing. 

The  old  principle  underlying  the  buying  and  selling  of 
goods,  called  caveat  emptor,  was  that  the  buyer  should  be- 
ware lest  the  seller  should  deceive  him  as  to  the  character 
of  the  goods.  Under  modern  methods,  this  policy  is  dis- 
appearing. The  consumer  on  the  one  side  is  losing  his 
power  of  shrewd  bargaining  and  his  judgment  of  quality 
in  regard  to  the  goods  which  he  buys.  Very  often,  also, 
he  buys  the  goods  by  samples  or  in  packages  and  has  no 
opportunity  to  inspect  them.  With  the  introduction  of  a 
guarantee  policy,  the  old  principle  that  the  buyer  should 
beware  lest  he  be  deceived  is  passing  away.  The  two  are  es- 
sentially inconsistent. 

Another  asset  which  the  merchant  desires  to  secure  is 
good  will.  This  means  that  the  customer  returns  again 
and  again  to  make  his  purchases  because  he  is  satisfied 
with  the  treatment  which  he  has  received.  The  kind  of 
goods  sold  and  the  kind  of  service  offered  in  the  selling 
are  important  factors  in  securing  good  will.  On  the  whole, 
good  will  is  the  result  of  a  successful  store  policy.  Every 
merchant  must  work  out  for  himself  the  most  effective  means 
of  securing  it. 

215.  General  Price  Problem. — The  general  price  problem 
is  primarily  a  problem  of  adjusting  the  conflicting  inter- 
ests, This  is  in  essence  the  bargaining  process.  Buyers  and 
sellers  have  come  together  with  interests  that  oppose  one 


BUSINESS  POLICIES  365 

another.  The  buyer  seeks  to  find  the  best  value  for  the  most 
"reasonable"  price,  and  the  seller  seeks  to  get  the  highest 
possible  net  return.  The  buyer  often  must  purchase  goods 
in  the  end,  and  the  seller  is  under  compulsion  to  set  a 
price  which  will  carry  his  goods  off  the  shelves.  It  is  un- 
der this  process  of  adjusting  business  interests  that  a  fair 
price  is  supposed  to  develop. 

The  question  of  price  is  related  to  every  step  in  the  dis- 
tributive process.  All  parts  of  the  distributive  organiza- 
tion are  said  to  exist  because  of  a  definite  economic  need. 
Where  there  is  a  definite  service,  therefore,  there  is  also 
a  fair  claim  for  remuneration.  The  practical  question  is 
how  much  each  service  is  worth  in  the  medium  of  exchange. 
Obviously,  this  is  a  very  complex  problem.  The  manu- 
facturer of  a  typewriter  recently  simplified  the  system  of 
distributing  his  goods  in  such  a  way  that  he  was  able  to 
reduce  the  price  to  the  consumer  from  $100  to  $51.  Never- 
theless, practically  all  the  functions  performed  by  the  pre- 
vious complex  distributive  organization  were  still  neces- 
sary under  the  simplified  organization.  And  yet  it  was 
possible  to  reduce  the  sales  price  by  $49  and  still  maintain 
a  margin  for  profit.  There  is  also  the  question  of  special 
sales  or  bargain  sales,  in  which  the  price  is  often  greatly 
reduced.  On  the  part  of  the  purchaser,  there  are  endless 
varieties  of  desires.  The  price,  therefore,  which  the  con- 
sumer is  willing  to  pay  will  vary  almost  indefinitely.  The 
general  business  theory,  however,  is  that  by  means  of  the 
very  operation  of  supply  and  demand  working  through  the 
distributive  system  a  reasonably  fair  price  is  determined. 

Price  is  also  connected  with  the  theory  of  competition. 
It  is  supposed  that  under  the  system  of  fair  competition, 
every  price  must  tend  toward  a  reasonable  basis.  It  is  by 
means  of  competition  that  supply  is  adjusted  to  demand 
and  that  the  whole  distributive  system  is  made  flexible. 
However  inadequately  this  system  may  work  in  a  given 


366  MARKETING 

case,  the  general  theory  is  still  maintained  that  intelligent, 
open  competition  will  adjust  prices  equitably. 

The  consumer  has  an  interest  in  the  price  problem  in  ad- 
dition to  the  mere  fact  that  a  price  must  be  paid.  It  is  to  be 
remembered  that  if  the  margin  of  profit  is  too  high,  there 
may  be  a  very  material  waste  of  social  energy  resulting.  If 
too  many  merchants  are  called  into  the  retail  trade,  the 
burden  will  fall  upon  the  consumer  in  the  form  of  retail 
prices.  All  instances  of  unfair  price  will  tend  also  to  de- 
range the  producing  and  distributing  organization  at  the 
expense  of  the  consumer.  It  may  be  that  in  some  cases 
to-day  the  functions  are  too  narrowly  divided,  so  that  more 
middlemen  stand  between  the  producer  and  the  consumer 
than  are  necessary.  This  situation  also  falls  at  last  upon 
the  shoulders  of  the  consumer.  In  general,  uneconomic 
practices  by  producers  and  by  middlemen  will  bring  an 
added  burden  upon  the  consumer  in  the  form  of  a  high 
market  price. 

The  price  of  commodities  is  also  related  directly  to  the 
cost  of  producing  and  distributing  them.  It  may  be  said 
in  general  that  the  cost  of  producing  and  handling  goods 
is  the  basis  of  prices.  It  is  the  basis,  however,  only  in  the 
sense  that  the  price  cannot  go  below  such  cost.  There  is 
also  another  problem  related  to  cost.  The  question  has  often 
been  asked:  "Is  it  advisable  to  sell  below  cost,  either 
temporarily  for  the  purpose  of  advertising,  or  generally, 
by  the  individual,  either  manufacturer  or  merchant,  who 
finds  he  is  in  an  advantageous  situation  ? "  In  other  words, 
is  it  fair  for  every  man,  whether  producer  or  dealer,  to 
sell  as  low  as  he  can  and  still  secure  a  margin  of  profit? 
Certain  department  stores  have  declared  that  they  do  not 
dare  to  sell  as  cheaply  as  it  is  possible  for  them  to  sell, 
lest  they  drive  out  other  competitors  and  thus  suffer  from 
the  consumer's  lack  of  opportunity  to  compare  prices. 
A  manufacturer  of  automobiles  has  refused  to  sell  his  ma- 


BUSINESS  POLICIES  367 

chines  as  low  as  it  was  possible  for  him  to  sell  them,  lest 
he  disrupt  the  entire  automobile  market.  The  whole  prob- 
lem is  one  of  reasonable  and  fair  adjustment. 

The  problem  of  price  is  obviously  related  to  the  problem 
of  profits.  This  is  on  the  theory  that  every  one  will  do 
what  pays  him  best,  or  what  he  thinks  will  pay  him  best. 
It  is  the  opportunity  of  securing  profits  that  directs  the 
policy  of  manufacturers  and  merchants.  The  number  of 
manufacturers,  the  number  of  wholesalers  or  retailers  who 
engage  in  a  certain  line  of  business  are  in  general  directed 
to  this  business  by  profit  opportunities. 

In  this  connection,  also,  there  is  the  question  of  "odd 
prices."  This  is  largely  a  matter  of  psychology.  It  in- 
volves mainly  the  optical  illusion  secured  by  the  odd  fig- 
ures given  in  the  price.  If  a  certain  article  is  marked 
$1.99,  the  effect  upon  the  mind  of  the  prospective  customer 
may  be  far  different  from  what  it  would  have  been  if  the 
price  were  marked  two  dollars.  There  also  is  the  considera- 
tion, largely  psychological,  as  to  whether  or  not  prices 
should  be  shown.  The  mark-down  sale  and  the  advertising 
of  prices  have  generally  not  been  approved  by  the  best 
merchants.  There  is  almost  always  an  element  of  suspi- 
cion connected  with  cut  rates.  It  is  difficult  to  convince 
the  customer  that  he  is  getting  the  same  grade  of  goods 
that  has  sold  at  standard  prices. 

There  is  the  problem  of  standardizing  prices.  It  is  true, 
in  general,  that  in  a  given  market  area  there  is  a  strong 
tendency  toward  a  single  price  for  any  given  commodity, 
modified  only  by  the  necessary  charges  for  distributing  and 
handling.  Thus  it  has  been  shown  that  wheat,  which  sells 
at  a  world-market  price,  will  have  its  price  determined  in 
the  primary  market  and  the  local  price  will  be  established 
by  a  certain  deduction  from  this  primary-market  price. 
The  development  within  recent  years  of  a  great  number 
of  trade  associations  has  greatly  reenforced  the  tendency 


368  MARKETING 

toward  standard  prices.  "Whether  prices  on  the  basis  of 
grade  should  or  should  not  be  standardized  under  a  system 
of  so-called  open  competition  is  still  an  unsolved  problem. 

There  is  the  consideration  of  price  intervals.  By  this 
is  meant  the  intervals  or  margins  by  which  prices  of  the 
same  commodities,  though  of  different  grades,  are  set.  Take 
the  case  of  neckties.  Suppose  a  certain  tie  is  priced  at 
$1.50.  It  is  the  common  practice  to  establish  the  next  in- 
terval of  price  at  least  at  $2.  In  the  case  of  suits,  the  price 
margin  between  grades  is  much  greater.  The  point  is  that 
these  price  margins  are  not  set  by  careful  calculation,  but 
by  standard  practice  and  business  habit.  No  customer 
without  special  or  technical  knowledge  can  determine 
whether  the  difference  in  grade  is  sufficient  to  cover  the 
margin  in  price. 

On  the  whole,  the  economic  force  which  directs  industrial 
and  trade  activity  is  the  setting  of  price.  The  market 
price  is  the  very  core  of  commercial  organization.  The 
price  itself  is  based  upon  market  information.  The  forces 
directly  affecting  it  are  the  most  potent  organizing  forced 
in  the  market.  Under  a  system  of  competition,  it  is  be- 
lieved that  these  forces  in  the  long  run  work  fairly  for  the 
producer,  for  the  distributor,  and  for  the  consumer. 

216.  Calculating  Price  Percentages. — A  practical  prob- 
lem arises  in  connection  with  determining  not  only  what 
increase  over  cost-price  should  be  made  for  selling-price, 
but  also  how  the  percentage  should  be  calculated.  The  per- 
centage is  directly  related  both  to  the  cost  of  commodities 
and  to  the  value  of  the  services  performed.  In  general  prac- 
tice, there  is  a  standard  percentage  that  is  used.  This 
percentage  is  the  basis  of  all  mark-up  of  prices.  There 
is  here  a  difference  in  method,  some  merchants  applying 
the  percentage  to  cost  price,  and  others  to  sales  price  in 
determining  profits.  The  best  practice  is  to  figure  the  per- 
centage on  the  selling,  rather  than  on  the  cost,  price.    The 


BUSINESS  POLICIES  369 

determining  of  the  margin  which  is  a  technical  part  of  price 
setting  calls  for  the  best  judgment  of  the  merchant.  "Each 
commodity,  with  the  exception  of  branded  articles  which 
must  be  sold  at  a  price  fixed  by  the  manufacturer,  and  ar- 
ticles of  which  the  price  is  fixed  by  competition,  should  be 
examined  and  a  price  fixed  according  to  what  it  will 
bring. ' ' 1  The  whole  problem  is  one  for  careful  considera- 
tion and  analysis. 

217.  Maintained  Prices. — A  problem  related  to  business 
policy  which  has  become  of  great  importance  within  recent 
years  is  price  maintenance.  This  involves  the  question  as 
to  whether  or  not  the  producer  of  goods  shall  retain  the 
power  of  determining  at  what  price  they  shall  be  sold  by 
the  retailer  to  the  consumer.  Presumably,  these  goods  have1 
been  sold  outright  by  the  producer  through  the  whole- 
saler, or  directly,  to  the  retailer.  Title  to  the  goods  has 
passed  from  the  producer.  He  has,  however,  advertised 
his  goods  to  the  consumer  at  a  stipulated  price. 

This  problem  of  price  maintenance  is  a  practical  one  of 
every-day  business  life  which  must  be  solved  in  the  end 
by  the  business  man  himself.  It  is  not  by  theory,  nor  by 
court  decision,  nor  by  precedent,  nor  by  "fireside  mus- 
ings," nor  by  glances  from  a  library  window  that  this 
problem  will  meet  a  final  satisfactory  solution.  There 
must  be  an  overturning  of  opposing  claims,  there  must 
be  an  array  of  facts  to  back  up  assertions,  before  there  is 
victory  for  one  side  or  the  other.  It  seems  very  likely 
also  that  the  elementary  principle  of  priority  of  interest 
must  first  be  established.  Fixed  price,  like  all  business 
problems,  is  not  a  single  or  a  simple  problem.  With  it 
are  combined  the  constituent  problems  of  branded  goods, 
of  trade-marks  and  market  control,  of  legal  rights  and 
commercial   rights,   of  long-run   policies   and   of  business 

1  Field,  Retail  Buying,  p.  118. 


370  MARKETING 

ethics,  to  say  nothing  of  the  overshadowing  problem  of 
social  control.  It  divides  itself,  however,  into  two  dis- 
tinct parts ;  one  has  to  do  with  the  commercial  phase  of  the 
problem,  and  the  other  with  the  legal  phase. 

218.  Commercial  Phase. — From  the  commercial  point  of 
view,  the  problem  of  price  maintenance  contains  the  issues 
of  all  business  problems.  These  issues  are  of  three  dif- 
ferent kinds;  there  are  the  issues  of  fact,  the  issues  of 
economic  theory,  and  the  issues  of  business  policy.  In 
essence,  the  problem  may  be  stated  as  follows:  shall  the 
producer  of  goods,  whether  identified  or  not,  be  respon- 
sible for  quality  and  quantity  and  control  the  conditions 
of  resale,  or  shall  the  distributor  have  the  responsibility 
for  quality  and  quantity  and  control  the  goods  after  they 
have  passed  from  the  hands  of  the  producer?  These 
questions  should  be  answered  either  on  the  basis  of  public 
welfare,  of  business  policy,  or  of  legal  reasoning.  Shall 
the  effects  of  the  fixed  resale  price  be  judged  from  the 
point  of  view  of  business  control,  or  shall  they  be  judged 
from  the  point  of  view  of  competition?  Satisfactory 
answers  to  these  inquiries  will  afford  a  solution  to  this 
difficult  problem.  Much  more  data  and  analysis  are  yet 
needed,  however,  for  a  dependable  conclusion. 

The  arguments  made  by  those  who  favor  price  main- 
tenance may  be  summarized  as  follows:  the  producer 
should  have  the  right  to  fix  the  resale  price  of  his  goods, 
because  (1)  there  is  no  other  way  to  protect  a  living  price 
for  the  dealer;  (2)  it  is  a  helpful  way  of  obtaining  com- 
mon-sense cooperation  between  producer  and  dealer;  (3) 
it  is  necessary  to  maintain  quality;  (4)  it  protects  the  con- 
sumer from  an  excessive  price;  (5)  it  prevents  un- 
scrupulous dealers  from  using  advertised  goods  as  leaders ; 
(6)  the  manufacturer  has  made  his  goods  to  be  sold  at  a 
price;  (7)  it  guarantees  the  goods  to  the  consumer;  (8)  it 


BUSINESS  POLICIES  371 

prevents  the  deceitful,  or  fraudulent,  cutting  of  price  by 
the  dealer;  (9)  it  prevents  dealers  with  large  capital  from 
driving  certain  goods  off  the  shelves  of  small  dealers  by 
means  of  price  cutting;  (10)  without  fixed  price,  the 
dealer  alone  sets  the  price  of  goods  for  which  he  is  not 
ultimately  responsible;  (11)  real  competition  to-day  is 
not  one  of  price,  but  one  between  articles. 

Those  who  oppose  the  fixing  by  the  manufacturer  of  the 
resale  price  claim  that  the  principle  of  price  maintenance 
is  not  justifiable,  because  (1)  it  is  selfish,  in  that  the  re- 
tailer desires  to  be  protected  from  underselling  by  his 
competitors;  (2)  it  is  unfair,  in  that  it  prevents  a  merchant 
from  giving  his  customers  the  advantage  of  his  money- 
saving  system;  (3)  manufacturers  raise  the  price  to  pay 
for  national  advertising  which  is  only  more  or  less  efficient  ; 

(4)  it  puts  the  big  dealer  on  a  plane  with  the  small  dealer; 

(5)  it  does  not  accomplish  the  desired  results,  namely,  in- 
creased sales;  (6)  it  enables  imitators  to  sell  at  high  prices; 
(7)  the  manufacturer  attempts  to  control  goods  after  he 
has  transferred  the  risk  for  them;  (8)  it  is  not  primarily 
any  of  the  manufacturer's  business;  (9)  as  a  principle,  it 
is  not  in  accord  with  the  general  proposition  that  a  de- 
clining price  means  increased  sales;  (10)  it  is  not  proved 
that  this  policy  either  maintains  or  enhances  quality; 
(11)  standards  of  quality,  in  the  great  mass  of  goods,  can- 
not be  set;  (12)  the  manufacturer  and  the  dealer  are  in- 
terested parties,  and  a  system  of  price  fixing  by  interested 
parties  is  inadvisable;  (13)  the  objection  to  price  cutting 
is  mainly  an  opposition  to  disturbers  and  invaders  of  the 
old  system;  (14)  the  fixed-price  system  stands  in  the  way 
of  experimenters. 

This  problem  of  the  commercial  effects  of  price  main- 
tenance must  remain  unsolved  until  there  is  further  experi- 
ment with  it,  and  until  a  sufficient  basis  of  fact  is  estab- 


372  MARKETING 

lished.  To-day  there  are  great  numbers  of  manufacturers 
and  merchants  on  both  sides  of  the  controversy.  Obviously, 
however,  a  certain  class,  especially  of  retailers,  are  favored 
by  such  a  practice.  They  are  the  small,  incompetent  re- 
tailers who  are  guaranteed  a  margin  of  profit  which  may 
permit  them  to  meet  the  competition  of  their  larger  and 
more  efficient  competitors.  These  dealers  are  in  favor  of 
price  maintenance.  A  bill  has  been  before  the  Congress 
for  several  years  to  establish  the  legal  status  of  fixing 
resale  price.  It  has  not  yet,  however,  succeeded  in  being 
enacted.2 

219.  Legal  Phase. — A  number  of  cases  have  been  tried 
by  the  court,  based  upon  the  right  of  the  producer  to  fix 
the  resale  price  of  his  goods.  The  great  majority  of  these 
cases  have  been  centered  upon  technical  points  of  the  law 
and  not  upon  the  general  principles  underlying  this  prob- 
lem. The  various  points  which  have  been  developed  in 
the  cases  at  law  are  the  legal  rights  in  regard  to  secret 
processes,  copyrights,  patents,  and  licenses  of  sale.  In  all 
of  these  instances,  however,  final  recourse  has  been  had 
to  the  Sherman  Anti-Trust  Act.  This  means  that  the 
question  has  ultimately  been  one  of  monopoly,  of  restraint 
of  trade,  or  of  illegal  combinations. 

Instances  of  legal  rights  in  relation  to  secret  processes 
are  to  be  found  in  the  early  cases  such  as  Miles  Medical 
Company  v.  Piatt,3  Hartman  v.  John  D.  Park  and  Sons 
Company.4  The  most  noted  case  dealing  with  copyrights 
under  the  law  is  that  of  Bobbs,  Merrill  and  Company  v. 
Strauss.5  The  question  of  patent  rights  is  dealt  with  in 
the  case  of  Henry  v.  Dick,6  and  U.  S.  v.  Kellogg 's  Toasted 
Cornflakes,7  and  Bauer  v.  O'Donnell.8    The  license  of  sale 

•Compare   the   Stephens  Bill.  "224  U.  S.  26. 

8 142  Fed.   606.  T  222  Fed.  725. 

4 145  Fed.   358.  8  229  U.  S.  1. 

■210  U.  S.  339. 


BUSINESS  POLICIES  373 

rights  are  discussed  in  the  ease  of  Victor  Talking  Machine 
Company  v.  R.  H.  Macy  Company.9 

These  cases  are  mostly  beside  the  point  of  price  main- 
tenance. They  have  to  do  in  general  with  common  law 
rights  as  contrasted  with  statute  rights.  They  have  not 
settled  definitely  the  relation  of  the  principle  of  price 
maintenance  to  the  Sherman  Anti-Trust  Law,  nor  have 
they  discussed  the  relation  of  this  principle  to  the  new 
elements  introduced  by  the  Federal  Trade  Commission  Act 
or  the  Clayton  Bill. 

There  is  one  case,  however,  that  is  based  upon  the 
essential  principle  involved  in  fixing  resale  price.  This  is 
the  case  of  the  Fisher  Flour  Mills  Company  v.  Swanson.10 
This  is  a  decision  of  the  lower  court,  and  applies  only  to 
a  limited  area.  The  issue  involved  in  the  case  is:  has  a 
manufacturer  who  has  given  a  reputation  to  particular 
goods  the  right  to  fix  in  his  contract  of  sale  to  retailers 
a  reasonable  minimum  price  at  which  the  goods  shall  be 
sold?  The  decision  in  this  instance  declared  that  this 
method  of  sale  did  not  come  within  the  Anti-Trust  Law, 
and  that  no  patent  rights  were  broken.  It  was  necessary, 
therefore,  to  refer  to  common  law  in  order  to  determine 
the  principle  involved.  On  this  basis,  it  is  declared  that 
the  fixing  of  resale  price  by  this  method  is  not  against 
public  policy.  "The  contracts  fixing  prices  as  incidental 
to  some  main  contract  and  involving  less  than  a  controlling 
part  of  a  given  commodity  in  a  given  market,  not  proceed- 
ing from  or  tending  to  create  or  maintain  a  monopoly, 
will  be  sustained  when  the  restriction  is,  under  the  cir- 
cumstances of  the  particular  case,  reasonable  in  reference 
to  the  interests  of  the  public  and  the  parties."  This  con- 
tract was  therefore  declared  valid  and  binding. 

•Sup.  Rep.,  vol.  xxxvii,  p.  412. 
"137  Pac.  Rep.  144. 


374  MARKETING 

The  legal  status  of  price  maintenance  is  still  not  clearly- 
determined. 

It  may  be  said  in  general  that  with  respect  to  patented  articles, 
their  sale  having  once  been  accomplished,  no  right  or  royalty 
in  the  articles  sold  being  retained  by  the  patentee,  and  no  profits 
from  the  sale  shared  by  him,  the  resale  price  thereof  cannot  be 
limited  or  fixed  either  by  notice  attached  to  the  article,  or  by 
contract.  It  must  not  be  inferred  from  this  that  conditional  sales 
whereby  title  is  retained  in  the  seller  pending  the  performance 
of  a  condition,  or  transfer  by  license  agreement,  where  such  con- 
ditional sale  or  license  transfer  is  for  the  purpose  of  maintaining 
price,  would  be  tolerated  by  the  federal  courts.  If  there  is  any 
device  by  which  a  patentee  or  his  assigns  can  legally  maintain 
resale  prices,  it  yet  remains  to  be  brought  to  the  attention  of  the 
court. 

To  copy  righted  articles,  the  same  general  proposition  applies 
as  applies  to  patented  goods. 

With  respect  to  proprietary  medicines  or  trade-marked  goods, 
where  an  outright  sale  of  the  goods  is  made,  the  manufacturer 
has  parted  with  all  proprietary  right  in  the  article  and  cannot 
therefore  control  the  resale  price  of  his  product  in  the  hands 
of  the  vendee. 

The  nearest  approach  to  a  successful  indirect  maintenance 
of  price  is  by  the  method  of  withholding  supplies  of  goods 
from  those  dealers  who  cut  prices.11 

220.  Problem  of  Credit. — A  part  of  the  business  policy 
of  a  merchant  is  the  establishment  of  a  principle  to  direct 
the  granting  of  credit.  Since  the  middle  of  the  Nineteenth 
Century,  the  practice  of  extending  credit  and  giving  dis- 
counts for  cash  payment  has  had  a  great  development. 
The  small  retailer  situated  far  from  the  wholesale  center 
and  buying  once  or  twice  a  year  his  allotment  of  goods 
needed  to  be  financed  while  he  sold  them.     This  situation 

11  Murchison,   Resale   Price   Maintenance,   p.   195. 


BUSINESS  POLICIES  375 

lies  at  the  basis  of  the  credit  system  which,  in  modified 
form,  has  come  down  to  the  present  day. 

In  recent  years,  however,  considerable  attention  has 
been  given  by  progressive  merchants  to  the  problem  of 
asking  and  granting  credit.  The  retail  dealer  asks  for 
credit  only  when  he  has  not  enough  capital  available  to 
take  advantage  of  cash  discounts.  As  has  been  said,  the 
large  retailers  with  plenty  of  capital  behind  their  opera- 
tions can  make  a  substantial  profit  on  their  investments 
solely  through  the  discounts  which  they  secure.  It  is, 
however,  the  problem  of  granting  credit  whether  by  whole- 
salers to  retailers,  or  retailers  to  customers,  that  offers  the- 
greatest  difficulty. 

As  regards  the  retailer,  it  can  be  said  that  the  amount 
of  credit  to  be  given  will  depend  on  four  chief  considera- 
tions :  character,  ability,  length  of  time,  amount  of  capital. 
A  man  in  business  is  "worth"  exactly  the  cash  value  of 
his  assets.  His  "credit"  is  measured  by  his  power  to 
borrow  money  and  his  ability  to  buy  on  time.  Credit  is 
no  longer  given  as  a  favor  to  the  borrower,  but  rather  with 
a  view  to  mutual  profit.  For  the  continued  welfare,  both 
of  lender  and  of  borrower,  there  is  need  of  a  careful  exami- 
nation of  the  retail  accounts.  It  is  also  true  that  the 
terms  of  sale  to  retail  customers  will  bear  a  definite  rela- 
tion to  that  same  customer's  terms  of  sale  to  others.  Large 
wholesalers  employ  a  man  whose  primary  duty  it  is  to 
make  the  necessary  investigations  for  the  establishment 
of  a  credit  policy. 

As  has  been  said,  the  most  enlightened  credit  policy  will 
have  to  do  with  the  personality  of  the  individual.  Credit 
can  never  be  separated  from  character.  The  ability  of  a 
man  to  do  business  is  also  an  important  consideration. 
There  is  too  the  amount  of  capital  actually  owned  by  the 
retailer  and  invested  in  his  business.  Obviously  a  man 
with  a  large  amount  of  his  own  capital  involved  will  feel 


376  MARKETING 

a  keener  and  more  direct  responsibility  for  good  business 
practice  than  a  man  who  does  not  have  so  much  at  stake. 
It  "was  estimated  in  1915  that  the  number  of  failures  in 
the  country  due  to  incompetence  was  33  per  cent,  and 
the  number  of  failures  due  to  lack  of  capital  was  23  per 
cent.  How  long  the  account  is  to  run  is  another  matter 
of  great  consequence.  This  will  determine  the  amount  of 
discount  offered  for  cash  sales  and  the  item  added  to  the 
price  in  order  to  cover  interest  on  the  capital  represented 
by  the  goods  sold  on  credit. 

The  problem  of  granting  credit  has  become  a  special 
study  in  itself.  All  methods  for  discovering  the  neces- 
sary facts  relating  to  the  prospective  borrower  are  used 
by  the  up-to-date  credit  man.  He  makes  inquiry  as  to 
the  previous  relationship  with  the  customer.  He  inquires 
into  the  books  of  the  retailer.  He  appeals  to  the  Credit 
Men's  Association.  He  looks  up  the  firm  in  Dunn  and 
Bradstreet's.  He  asks  the  borrower  to  fill  out  certain 
blanks  and  by  all  possible  direct  and  indirect  methods,  he 
tries  to  discover  the  essential  facts  upon  which  a  sound 
credit  policy  can  be  based.  In  recent  years  also,  the  Federal 
Trade  Commission  has  been  doing  excellent  work  in  the 
matter  of  standardizing  accounting  systems  so  as  to  render 
possible  for  the  retailer,  as  well  as  for  the  wholesaler  who 
grants  him  credit,  a  more  accurate  knowledge  of  his  busi- 
ness. A  pamphlet  recently  issued  by  this  Commission  de- 
clares: "The  small  manufacturer,  the  country  storekeeper, 
and  the  retail  merchant  often  do  not  get  at  the  banks  the 
credit  that  they  ought  to  receive,  due  to  the  fact  that  they 
are  unable  to  present  balance  sheets  in  accordance  with 
good  business  practice.  These  men,  as  a  rule,  are  just  as 
good  business  men,  in  many  respects,  as  those  of  larger 
operations.  They  have  brains,  ability,  knowledge  of  their 
wares  and  of  their  customers,  but  they  do  not  speak  the 


BUSINESS  POLICIES  377 

language  of  the  banks,  in  that  they  are  not  able  to  present 
a  statement  showing  their  assets  and  liabilities." 

The  Credit  Men's  Association  also  has  undertaken  a 
nation-wide  campaign  of  education  for  the  purpose  of 
educating  the  retailer  to  a  better  knowledge  of  his  busi- 
ness. They  are  carrying  on  this  campaign  not  from  any 
unselfish  motive,  but  in  order  that  their  own  problems  may 
be  more  easily  solved.  They  state  in  a  recent  report  that 
"as  grantors  of  credit,  we  are  vitally  interested  in  better- 
ing business  and  credit  conditions.  Any  movement  that 
makes  it  safer  to  transact  business  naturally  receives  our 
attention  and  support.  It  is,  therefore,  not  surprising 
that  the  National  Association  of  Credit  Men,  the  per- 
sonification of  honesty  and  efficiency  in  business,  should  be 
tremendously  concerned  in  the  standard  of  business  of  the 
retail  merchant." 

The  retailer  has  his  credit  problem  in  relation  to  the 
customer.  How  much  credit  should  be  granted  to  the 
customer,  and  for  how  long  a  time,  are  very  critical  prob- 
lems, and  of  special  importance  in  period  ,  of  radical 
change  or  of  uncertainty.  Many  a  retailer  has  been  bank- 
rupted because  he  has  been  too  generous  in  granting  credit. 
On  the  other  hand,  many  department  stores  and  other 
large  dealers  have  a  well-defined  policy  to  encourage  credit 
or  charge  accounts.  They  find  that  these  bind  to  them  the 
customers  who  buy  on  time.  The  retailers  who  grant 
credit  to  their  customers  must  meet  in  competition  the 
mail-order  houses,  the  chain  stores,  and  economy  stores 
that  have  reduced  the  retail  prices  on  goods  by  eliminating 
to  a  large  extent  credit  and  delivery  service.  The  entire 
problem  of  granting  credit  to  customers  is  one  to  be  solved 
by  the  individual  merchant  in  his  own  house  policy. 

221.  Unfair  Competition.— The  formulating  of  business 
policies  must  inevitably  involve  the  question  of  general 
business  practices.     With  these  is  connected  the  problem 


378  MARKETING 

of  unfair  competition.  What  is  fair  and  what  is  unfair 
remains  yet  to  be  definitely  determined,  either  by  business 
men  or  by  the  courts.  The  task  of  defining  unfair  com- 
petition has  been  squarely  facing  the  Supreme  Court  of 
the  United  States  for  several  years.  But  that  august 
body  has  not  yet  made  a  thorough  survey,  nor  has  it  laid 
the  foundation  for  an  enduring  and  practical  definition. 
Until  it  has  done  so,  both  practical  business  men  and 
economists  will  remain  uncertain. 

Fair  competition  has  been  defined  as  economic  competi- 
tion on  the  basis  of  efficiency.  Whatever  practice  cannot 
fulfill  these  conditions  should  be  declared  unfair.  The 
points  in  production  and  distribution  at  which  competi- 
tion actually  occurs  are  various.  It  may  be  due  either  to 
inequality  in  size,  or  access  to  raw  materials,  or  location, 
or  unusually  capable  workmen,  or  able  management,  or  new 
machinery,  or  patents  and  special  processes. 

The  Federal  Trade  Commission  that  was  established  to 
deal  with  this  particular  problem  has  indicated  certain 
practices  as  being  unfair.  They  are  as  follows :  local  price 
cutting;  operation  of  bogus  independent  concerns;  main- 
tenance of  "fighting  brands";  lease,  sale,  purchase,  or  use 
of  other  articles  as  a  condition  to  the  lease,  sale,  purchase, 
or  use  of  certain  required  articles ;  exclusive  purchase  and 
sales  arrangements;  rebates  and  preferential  contracts; 
acquisition  of  exclusive  or  dominant  control  of  machinery 
or  goods  used  in  the  manufacturing  processes;  manipula- 
tion ;  black  lists,  and  white  lists ;  espionage  and  use  of  detec- 
tives; coercion,  threats,  and  intimidation;  and  fixing  the 
channels  of  trade.  All  of  these  methods  will  be  judged 
largely  from  the  point  of  view  taken,  and  different  con- 
clusions may  be  reached,  due  to  differences  in  attitude. 
The  problem  can  be  attacked  either  by  establishing  legisla- 
tion to  direct  and  limit  business  practice,  or  by  the  self- 
discipline  of  business  men.     Undoubtedly,  the  best   and 


BUSINESS  POLICIES  379 

most  enduring  results  would  be  obtained  if  unquestioned 
business  practices  developed  from  business  itself  and  were 
not  left  to  be  enforced  by  outside  influence. 

Competition  cannot  be  fair  unless  it  is  intelligent.  More 
intelligent  competition  can  only  be  secured  by  a  better 
knowledge  of  business  principles.  Progress  undoubtedly 
is  being  made  toward  better  business  practices.  Many 
methods  that  only  a  few  years  ago  were  permitted  are 
now  wholely  discarded.  It  is  probably  true  that  fairness 
in  business  practice  is  wholly  relative,  and  that  with  an 
increasing  knowledge  there  will  be  constantly  a  rising 
standard  of  practice. 

A  more  thorough  analysis  of  business  practice  should 
reveal  the  source  of  responsibility  at  every  step  in  the 
economic  process.  "When  this  responsibility  is  once 
definitely  located,  the  problem  of  dealing  with  practices 
will  be  greatly  simplified.  There  is  a  growing  attitude  on 
the  part  of  business  men  to  carry  on  their  businesses  openly 
and  with  a  full  knowledge  on  the  part  of  consumers  and 
competitors.  Many  retailers,  wholesalers,  and  manufac- 
turers to-day  are  declaring  that  they  have  nothing  to  con- 
ceal. Such  an  attitude  of  openness  and  frankness  can 
arise  only  from  a  conviction  of  fair  dealing ;  wherever  such 
an  attitude  exists,  unfair  competition  will  be  done  away 
with. 

222.  Price  Cutting.— The  movement  for  standardized 
prices  that  has  accompanied  the  standardization,  trade 
marking,  and  advertising  of  goods,  has  been  reenforced  by 
the  rapidly  multiplying  trade  associations,  and  has  been 
aimed  at  the  stopping  of  price-cutting  by  retailers.  Methods 
of  reducing  price  are  countless  in  number,  but  fall  into  two 
general  groups:  (1)  direct  price  cutting,  and  (2)  indirect 
price  cutting.  The  first  group  is  by  far  the  larger  and 
more  varied.     It  is  illustrated   by  the  bargain  sale  and 


380  MARKETING 

"leader."  The  second  type  is  illustrated  by  the  use  of 
trading  stamps  and  coupons. 

The  "new  type"  of  retailer,  such  as  the  department 
store,  the  chain  store,  and  the  mail-order  house,  by  buying 
in  large  lots  seeks  a  substantial  quantity  discount  and 
claims  the  right  to  pass  this  saving  on  to  the  consumer  in  a 
lowered  retail  price,  in  order  to  increase  the  volume  of 
sales.  The  manufacturer,  who  has  branded  his  goods  and 
advertised  them,  wants  to  keep  them  on  the  shelves  of  the 
regular  retailer  and  objects  to  price  cutting  by  the  big 
retailer.  So  likewise  does  the  regular  retailer.  This  con- 
test underlies  the  whole  problem  of  price  maintenance. 

Special  sales,  such  as  bargain  sales,  season-end  sales,  fire 
sales,  mill-end  sales,  etc.,  are  often  used  to  move  goods  off 
the  shelves  of  retailers  or  out  of  the  factory.  Even  when 
legitimately  used,  they  are  a  confession  of  error  in  judg- 
ment on  the  part  of  the  buyer  or  the  manufacturer.  He 
has  misjudged  the  market  at  the  price  asked.  Such  a  sys- 
tem also  is  open  to  ready  abuse.  As  a  settled  prearranged 
policy  it  is  uneconomic.  For  the  dealer,  more  frequent 
and  smaller  purchases  with  a  speedier  turnover  is  better 
business.  For  the  manufacturer,  a  more  careful  study  of 
the  market  and  a  more  conservative  production  planning 
is  better  business. 

The  use  of  trading  stamps  or  coupons  is  a  question  of 
policy.  As  a  means  of  advertising,  of  drawing  trade,  and 
stimulating  cash  purchases,  they  are  effective,  as  the  violent 
opposition  to  them  shows.  The  opponents  claim  that  they 
are  forced  into  using  them  against  their  will  and  desire. 
This  is  positive  proof  of  their  efficacy.  Whether  or  not 
the  very  fact  that  such  a  policy,  by  one  or  more  merchants, 
will  drive  others  to  the  adoption  of  it,  does  not  in  the  end 
stultify  its  effects,  is  a  serious  question.  Like  all  other 
claims,  this  one  can  be  substantiated  only  by  experience. 

The  means  used  to  abolish  price  cutting  has  been  an 


BUSINESS  POLICIES  381 

appeal  to  the  law.  Decisions  of  courts  and  statutes  are 
urged  to  prohibit  price-cutting  policies.  Each  side  accuses 
the  other  of  dishonesty.  The  manufacturer  and  the  regular 
retailer  declare  that  price  cutters  deliberately  cash  in  on 
the  goodwill  attached  to  well-known  brands  for  selfish  pur- 
poses. The  large  retailers  claim  that  manufacturers  and 
old-line  retailers  are  holding  from  the  public  a  legitimate 
and  realizable  lower  price.  There  may  be  truth  on  both 
sides.  But  the  spirit  of  dishonesty  is  never  destroyed  by 
legislation.  So  long  as  competition  runs  on  the  basis  of 
efficiency  and  fair  dealing,  there  is  no  need  for  restrictive 
legislation. 

Suggestions  for  Study 

The  business  policies  connected  with  the  commodity  in- 
vestigated by  each  student  should  be  carefully  studied  at 
this  point.  The  following  topics  can  be  taken  up  in  the 
classroom  discussion: 

House  or  Store  Policy 

1.  The  meaning  of  house  or  store  policy. 

2.  A  merchandising  policy  in  its  relation  to  selling  function. 

3.  Economic,  psychological,  ethical,  and  social  considerations 
in  a  business  policy. 

4.  The  guarantee  policy. 

5.  The  element  of  risk  in  a  business  policy. 

6.  Caveat  emptor  in  modern  business. 

7.  Goodwill  and  business  policy. 

The  General  Price  Problem 

1.  Economics  of  price. 

2.  Social  aspects  of  the  price  problem. 

3.  Standardizing  prices. 

4.  Psychology  of  "odd"  prices. 

5.  Price  intervals. 


382  MAEKETING 

6.  The  fair  price. 

7.  The  normal  price. 

Price   Maintenance 

1.  Commercial  importance  of  fixed  resale  price  to  large  manu- 
facturers, small  manufacturers,  wholesalers,  retailers,  con- 
sumers. 

2.  Maintained  price  and  monopoly. 

3.  Maintained  price  and  competition. 

4.  Maintained  price  and  quality  of  goods. 

5.  Maintained  price  and  advertising. 

6.  Trend  of  legal  decisions. 

7.  Maintained  price  and  copyrights,  patent  rights,  secret  proc- 
esses, licenses  of  sales. 

8.  Maintained  price  and  restraint  of  trade. 

9.  Legal  principles  vs.  commercial  interests. 

Problem  of  Mercantile  Credit 

1.  Origin  of  problem. 

2.  Data  for  granting  commercial  credit, 
(a)     Kind  of  data  needed. 

(&)     Sources  of  data. 

3.  Function  of  credit  man. 

4.  Costs  of  granting  credit. 

5.  Credit  and  competition. 

Unfair  Competition 

1.  Theory  of  free  competition. 

2.  Regulated  competition  in  a  democracy. 

3.  Enforced  competition. 

4.  Point  of  view  in  judging  competitive  methods. 
Readings  : 

House  or  Store  Policy 

Nystrom,  Retail  Store  Management,  Chap.  XII. 
Store  Management,  Chap.  VII. 
Swinney,  Merchandising,  Chaps.  II,  VII. 


BUSINESS  POLICIES  383 

Johnson,  Business  and  the  Man,  Chap.  V. 
Fiske,  Retail  Selling,  Chap.  III. 

Price  Policies 

Nystrorn,  Economics  of  Retailing,  Chaps.  XI,  XV. 

Cherington,  Advertising  as  a  Business  Force,  pp.  330-428. 

Mahin,  Advertising,  Chap.  19. 

Rogers,  Goodwill,  Trade-Marks,  etc.,  Chap.  XXVII. 

Fernley,  Price  Maintenance,  Chaps.  II,  III. 

Stevens,  Unfair  Competition. 

Montague,  Business  Competition  and  the  Law. 

Murchison,  Resale  Price  Maintenance. 

Annals    of    the    American   Academy    of   Political   and   Social 

Science,  January,  1916,  p.  55. 
American  Economic  Review,  vol.  vi,  No.  1. 
Journal  of  Political  Economy,  January,  1916,  pp.  921-950. 
Printer's  Ink,  April  2,  1914,  p.  33,  64;  April  23,  1914,  p.  23; 

November  5,  1914,  p.  51;  March  19,  1914,  p.  64;  December 

31,  1914,  p.  52. 
Cases:     142  Fed.  Rep.  606;  145  Fed.  Rep.  358;  149  Fed.  Rep. 

838;  214  U.  S.  339;  220  U.  S.  373;  224  U.  S.  26;  222  Fed. 

Rep.  725;  229  U.  S.  1;  137  Pac.  Rep.  144;  227  Fed.  Rep. 

46;  227  Fed.  Rep.  124;  Sup.  Rep.  vol.  xxxvii,  p.  412. 


CHAPTER  XVIII 

DEFENDING    AND   EXTENDING    THE    MARKET 

223.  The  Problems  of  Market  Extension. — There  are 
two  general  problems  facing  any  merchant  in  his  rela- 
tion to  his  market.  One  is  a  problem  of  defense,  that  is, 
to  hold  the  customers  already  secured,  to  guard  his  good 
name,  and  to  prevent  other  merchants  from  cashing  in  on 
his  own  efforts.  The  other  is  a  problem  of  offense,  that  is, 
to  extend  the  frontiers  of  his  market  or  to  sell  more  inten- 
sively in  the  territory  already  covered. 

An  attitude  of  defense  is  a  passive  one.  Just  as  no 
military  victory  was  ever  gained  without  an  attack,  so  no 
great  commercial  success  will  be  achieved  without  an 
aggressive  policy.  Few  manufacturers  or  merchants  are 
satisfied  with  the  present  size  of  business,  even  in  the 
abnormal  prosperity  of  war  times.  The  typical  American 
manufacturer  wants  to  tear  down  his  factories  and  build 
greater  ones,  or  at  least  to  attach  additions,  and  if  his 
output  now  runs  up  into  thousands,  he  desires  millions; 
if  into  millions,  he  wants  tens  and  hundreds  of  millions. 
And  so  likewise  with  merchants  who  seek  greater  business 
volume  year  by  year. 

Business  experience  and  the  romance  of  American  busi- 
ness incite  such  ambitions.  The  home  market  for  most 
products  has  had  a  natural  and  rapid  growth,  due,  of 
course,  to  increase  of  population  and  of  purchasing  power, 
and  to  better  general  education  and  transportation  facilities. 
But  the  market  offered  by  our  own  105,000,000  inhabitants 

384 


DEFENDING  AND  EXTENDING  THE  MARKET    385 

is  not  big  enough.  There  is  a  wideawake  demand  for  a 
foreign  market.  The  eyes  of  manufacturers  and  merchants 
are  lifted  to  the  far-distant  horizons;  men  speak  to-day 
casually  of  the  South  American  market;  orders  are  being 
sent  to  the  Orient ;  a  special  corporation  for  fostering  trade 
with  Russia  has  been  organized. 

Thousands  of  business  men,  who  do  not  yet  look  across 
the  sea  for  more  trade,  are  studying  more  minutely  the 
nooks  and  corners  of  the  home  market.  They  want  to 
sell  more  goods  either  at  the  expense  of  rivals'  sales,  or 
through  increased  purchases  of  consumers.  In  order  to 
realize  this  ambition,  their  analysis  turns  upon  new  appeals, 
new  motives,  newly  awakened  desires,  new  types  among 
the  consumers,  upon  new  forms,  new  packages,  more  attrac- 
tive appearance,  or  better  general  adaptation  of  the  goods, 
and  upon  the  most  effective  methods  for  defending  the 
good  name  and  the  goodwill  of  their  products. 

Problems,  therefore,  have  arisen  concerning  trade  names, 
trade-marks,  the  form  and  general  appearance  of  the  com- 
modity units,  and  the  most  forceful  selling  points.  In  the 
solution  of  these  problems,  law  and  psychology  are  inter- 
mingled, and  even  art  has  its  voice.  Some  attempt  is  here 
made  to  show  how  to  discover  new  fields  and  new  methods, 
and  to  define  the  defensive  rights  of  the  successful 
merchant. 

224.  Scope  and  Character  of  Market. — As  has  been 
shown,  the  character  of  a  market  is  dependent  to  a  great 
degree  upon  the  character  of  the  commodity.  But  a  market 
may  be  either  developed  or  undeveloped,  either  actual  or 
potential.  It  may  already  be  overdone;  one  would  not,  for 
example,  invest  large  sums  of  money  to-day  in  a  national 
company  to  sell  horsewhips.  But  the  scope  and  character 
of  the  market  will  in  turn  largely  determine  the  method 
used  to  reach  it.    This  holds  true  for  manufacturer,  jobber, 


386  MARKETING 

and  retailer.  The  selling  medium  may  be  either  salesmen, 
or  advertising,  or  both. 

In  the  selection  of  the  medium,  the  scope  and  character 
of  the  market  will  be  an  important  factor.  Many  forms  of 
advertising  are  less  expensive  than  salesmen.  The  volume 
of  business  may  not  justify  a  heavy  expense.  "Whether 
sold  through  a  salesman  or  by  description,  if  the  market 
is  to  be  retained  in  a  keen  competitive  struggle,  and  espe- 
cially if  it  is  to  be  extended,  there  must  be  a  careful  analysis 
of  the  commodity  unit,  and  an  assiduous  building  up  of 
defenses  through  trade-marks  and  trade  names. 

Whether  the  market  is  to  be  more  intensively  cultivated 
or  is  to  be  more  widely  extended,  a  careful  scrutiny  must 
be  made  of  the  commodity  as  to  the  possibilities  of  appeal 
that  it  contains.  Goods  are  made  to  satisfy  human  wants, 
and  the  practical  problem  of  salesmanship  is  to  mate  the 
commodity  and  the  want.  An  early  step,  therefore,  in 
extending  the  market  is  a  careful  study  of  the  most  effective 
appeal. 

225.  Analyzing  the  Appeal. — Primarily,  the  analysis  of 
appeal  is  a  study  in  human  nature;  it  is  largely  a  matter 
of  psychology.  One  successful  salesman  holds  to  the  theory 
that  the  most  effective  appeal  is  by  suggestion  through  re- 
peated impressions.  This  is  not  so  much  a  matter  of 
persistent  advertising  as  it  is  of  putting  things  before  the 
prospective  customer  so  obviously  that  he  cannot  escape 
noticing  them,  and  so  persistently  that  finally  he  succumbs 
to  suggestion  and  buys.  Practically,  this  has  meant  the 
placing  of  as  many  hurdles  as  possible  in  the  way  of  the 
prospective  buyer  who  has  entered  the  store. 

This  method,  however  shrewd  it  may  be,  is  not  a  high 
type  of  merchandising.  True  "salesmanship  is  prof ounder 
than  this  is  more  farseeing,  for  it  works  along  the  line 
of  long-time  policies.  Real  salesmanship  is  real  service 
and  not  merely  putting  something  over.     The  analysis  of 


DEFENDING  AND  EXTENDING  THE  MARKET     387 

appeal  is  broadly  economic  in  character;  it  is  an  analysis 
of  utilities. 

The  best  appeal  is  to  human  wants,  real  or  potential, 
that  make  for  better  well-being.  If  true  merchandising 
is  service,  if  selling  is  making  possible  the  satisfaction  of 
wants  that  are  justifiable  and  worthy,  then  the  analysis  of 
appeal  is  a  study  of  a  commodity  in  all  of  its  relations 
to  those  wants.  It  is  a  study  of  a  commodity  that  is 
philosophical  and  ethical  as  well  as  economic.  Specifically, 
such  an  analysis  may  take  any  one  of  several  different 
methods. 

A  constructive  study  of  appeal  calls  for  business  imagi- 
nation. It  is  in  fact  creative  work  in  as  real  a  sense  as 
the  work  of  the  musician  or  painter.  The  best  merchant, 
though  not  necessarily  the  most  successful  financially,  is 
a  leader  in  his  community;  his  customers  rely  upon  him, 
accept  his  judgment,  follow  his  suggestions.  If  the  mer- 
chant is  all  that  he  should  be,  he  is  a  powerful  factor  in 
directing  purchasing  power. 

The  appeal  may  be  studied  by  looking  within  the  com- 
modity or  by  looking  within  the  people.  It  may  be  form, 
or  appearance,  or  sendee,  or  use.  One  may  inquire  as 
to  what  feature  about  the  goods,  either  their  manufacture,' 
appearance,  quality,  use,  or  price,  will  stimulate  interest 
and  create  a  desire  for  their  possession.  On  the  other 
hand,  one  may  ask  what  means  may  be  found  for  making 
specific  appeals  to  individuals.  Appeals  for  the  "shawl" 
trade  will  differ  from  those  for  the  limousine  trade. 

226.  Appearance  of  Commodity  Unit. — An  early  con- 
sideration of  the  commodity  whose  market  is  to  be  extended 
is  the  appearance  that  it  makes.  It  is  possible  to  transfer 
a  commodity  from  the  staple  class  to  the  specialty  class 
of  goods  by  attention  to  its  appearance.  A  tooth  brush, 
for  instance,  may  be  sold  from  an  indiscriminate  group 
lying  on  a  counter,  or  it  may  be  wrapped  individually  in 


388  MAEKETING 

a  paper  envelope.  A  premium  can  be  charged  for  this 
simple  service  of  giving  individuality  to  a  staple  com- 
modity. A  loaf  of  bread  can  be  sold  either  wrapped  care- 
fully in  paper  or  exposed  to  the  elements.  In  the  one 
case,  the  loaf  may  never  be  touched  by  human  hands,  and 
will  look  clean  and  sanitary.  There  are  many  other  such 
little  touches  which  will  give  distinction  to  a  commodity 
unit  without  material  expense  on  the  part  of  the  dealer. 
In  fact,  there  is  here  a  whole  realm  of  psychological  facts 
in  the  matter  of  taste  which  may  be  carefully  studied. 

In  a  study  of  the  commodity  unit,  there  will  always  be 
certain  practical  considerations.  Not  only  is  it  the  duty 
of  the  manufacturer  and  merchant  to  analyze  his  goods 
with  particular  reference  to  the  human  wants  which  they 
are  intended  to  satisfy,  but  also  to  consider  the  matter  of 
convenience  of  size.  There  are  certain  manufacturers  of 
macaroni  who  have  had  a  difficult  problem  to  meet.  This 
commodity  had  been  sold  in  a  standard  package  for  a 
price  which  was  printed  on  the  outside.  The  rising  costs 
of  materials  required  that  a  change  should  be  made.  As 
has  been  pointed  out,  it  was  possible  for  them  either  to 
put  less  material  into  the  box,  or  to  increase  the  size  of  the 
box  and  the  price  in  proportion  to  requirements,  or  to  in- 
crease the  price  outright.  Consideration,  however,  had 
already  been  given  to  the  amount  of  macaroni  which  the 
average  family  would  be  likely  to  buy.  In  the  original 
package,  this  amount  had  been  nicely  adjusted  to  the 
average  family  requirements.  Any  change  in  amount  would 
therefore  disturb  this  adjustment.  Wheat  flour  is  usually 
sold  on  the  basis  of  a  barrel,  which  is  supposed  to  contain 
196  pounds.  In  the  large  cities  where  storage  space  is  greatly 
limited,  such  a  large  unit  is  impracticable.  Dealers  have 
therefore  insisted  that  smaller  units  should  be  used.  In 
certain  times  of  fluctuating  prices,  flour  has  been  sold,  by 
such  retailers  as  chain  stores,  by  the  pound.    In  many  in- 


DEFENDING  AND  EXTENDING  THE  MARKET    389 

stances,  one-eighth  of  a  barrel,  or  even  one-twelfth  of  a 
barrel  has  been  put  up  in  separate  packages.  Sugar  is 
another  staple  now  found  in  packages  as  small  as  one-half 
pound.  The  basis  of  this  entire  problem  of  adjusting  size 
of  a  purchasable  unit  to  the  convenience  of  customers  is 
to  enable  them  to  buy  what  they  want  in  the  amount  they 
want.    This  is,  of  course,  a  part  of  the  duty  of  the  retailer. 

Another  consideration  in  studying  the  commodity  unit 
is  the  matter  of  standardization.  It  is  obviously  possible 
for  a  manufacturer  to  standardize  both  the  quantity  and 
the  quality  of  his  products.  If  the  manufacturer  has  not 
done  this,  it  remains  possible  for  some  middleman  to  per- 
form this  function.  Standardization,  however,  must  be 
done  before  the  moment  of  sale.  It  is  a  matter  of  pre- 
planning. Manufacturers  and  dealers  have  not  been  slow 
to  see  the  possibilities  for  control  which  lie  in  the  stand- 
ardizing of  a  commodity.  The  maker,  for  instance,  can 
determine  a  standard  unit  for  his  goods  and,  either  through 
advertising  on  the  package  itself  or  through  some  other 
medium,  can  compel  his  dealers  to  adopt  this  unit.  It 
is  interesting  to  note  that  the  growers  of  citrus  fruits 
have  attempted  by  such  means  to  control  their  commodities 
until  they  reach  the  hands  of  the  consumers.  Oranges  and 
lemons  are  wrapped  in  tissue  paper  after  having  been  care- 
fully graded  by  special  processes,  and  these  wrappers  pre- 
sumably protect  the  consumer  and  the  grower  from  all 
unscrupulous  dealers.  In  fact,  standardization  of  quality 
and  quantity  is  so  potent  a  force  as  to  compel  fair  dealing 
on  the  part  of  the  middlemen. 

It  is  obvious,  however,  that  if  commodities  leave  the 
hands  of  the  maker  unstandardized  either  as  to  quantity 
or  quality,  there  is  opportunity  for  some  middleman  to 
control  the  marketing  process  by  means  of  the  standardiza- 
tion. Some  large  jobbers  are  to-day  doing  this  for  a 
number  of  staple  commodities.    The  particular  point  to  be 


390  MARKETING 

emphasized  is  that  whoever  standardizes  the  goods  is  in 
a  position  to  control  their  distribution. 

The  most  perplexing  problem  in  connection  with  stand- 
ardizing commodities  has  to  do  with  those  goods  that  have 
a  large  element  of  style  in  them.  During  the  stress  of  the 
war,  the  Commercial  Economy  Board  in  the  Council  of 
National  Defense  undertook  to  set  different  standards  for 
the  making  of  shoes.  These  standards  had  to  do  with  the 
height  of  shoes,  the  character  of  the  heel,  and  the  quality 
and  kind  of  material  which  went  into  them.  It  was  recom- 
mended, for  instance,  by  this  Board,  that  for  the  fall  sea- 
son of  1918  no  women's  shoes  should  exceed  nine  inches 
in  height,  measured  from  the  breast  of  the  heel  at  one 
side  of  the  center  to  the  top  at  the  side  of  the  finished 
shoe;  that  no  children's  or  misses'  shoes  should  exceed 
seven  inches  in  height ;  that  all  men 's  shoes,  except  canvas, 
should  be  restricted  in  color  to  black  and  two  shades  of 
tan;  that  no  women's  shoes  should  be  of  colors  other  than 
white,  black,  two  shades  of  tan,  and  two  of  gray. 

In  foreign  countries,  the  governments  have  on  occasion 
undertaken  to  standardize  the  styles  in  wearing  apparel. 
It  is  said  that  the  British  Government  was  unable  to  sell 
a  great  many  of  the  standard  suits  which  it  had  made 
for  men.  The  point  to  be  noticed  particularly  is  that  the 
will  of  the  customer  may  revolt  against  the  standard  estab- 
lished by  the  producer. 

A  further  consideration  of  the  commodity  unit  has  to 
do  with  placing  the  material  in  a  package.  There  are 
obviously  several  advantages,  especially  from  the  point  of 
view  of  the  manufacturer,  in  placing  products  in  standard 
packages.  The  package  itself  offers  certain  advertising 
possibilities.  It  protects  the  goods  against  misuse  of  the 
good-will  of  the  producer  by  competitors.  It  protects  the 
goods  against  unscrupulous  dealers.  It  also  protects  them 
against  abusive  and  unsanitary  conditions  and  methods  of 


DEFENDING  AND  EXTENDING  THE  MARKET    391 

handling.  It  enables  the  producer  to  indicate  to  the  con- 
sumer in  writing,  even  over  his  own  signature,  the  quality 
and  quantity  and  to  indicate  what  in  his  judgment  is  a 
fair  retail  price.  Goods  that  have  been  placed  in  neat, 
convenient,  standard  packages  can  usually  be  handled 
more  readily  than  goods  that  are  sold  in  bulk.  It  is  even 
possible  to  add  certain  by-products  of  service  by  placing 
the  commodity  in  such  a  container  as  may  later  on  be  used 
in  various  ways  by  the  consumer.  There  is,  for  example, 
the  familiar  story  of  the  can  containing  oil  which  has 
served  many  a  useful  purpose  in  far-away  places  of  the 
earth.  It  is  also  easy  to  identify  goods  which  have  been 
placed  in  packages.  In  many  cases,  the  package  itself  has 
given  a  personal  touch  to  the  commodity. 

One  manufacturer  of  piston  rings  has  declared  that  the 
package  that  contains  his  special  product  affords  the  con- 
sumer protection  in  five  different  ways.  "It  is  your  pro- 
tection against  substitution;  it  protects  the  garage  and 
repair  man  from  having  palmed  off  on  him  inefficient  imi- 
tation rings;  it  protects  the  rings  themselves  from  rust 
and  the  effects  of  rough  handling  while  in  stock ;  it  iden- 
tifies the  goods  as  being  our  own  make;  it  protects  you  in 
the  matter  of  price."  For  all  of  these  services,  however, 
the  consumer  must  pay.  Package  goods  undoubtedly  carry 
a  higher  price  in  the  market  than  goods  that  are  sold  in 
bulk. 

It  may  be  pointed  out,  in  this  connection,  that  packages 
serve  a  further  purpose.  As  a  matter  of  fact,  the  placing 
of  a  commodity  in  storage  in  small  units  is  accomplished 
by  the  use  of  protecting  containers.  Like  the  snail,  the 
commodity  in  a  package  carries  its  shelter  along  with  it. 

There  are  difficulties,  also,  connected  with  the  placing  of 
goods  in  containers.  In  the  first  place,  it  is  not  possible 
for  purchasers  to  inspect  them.  They  are  compelled  to 
buy  "sight  unseen."     The  consumer,  therefore,  may  find 


392  MARKETING 

after  he  has  made  the  purchase  that  the  commodity  is  not 
what  he  thought  it  would  be.  Once  an  error  of  this  kind 
is  made,  the  experience  is  always  associated  with  any 
given  package.  The  producer  has,  in  consequence,  a  diffi- 
cult problem  to  overcome  in  restoring  the  good  name  of  his 
product.  It  is  also  hard  to  change  either  the  quality  or 
the  quantity  or  the  price  once  these  have  been  established 
in  connection  with  a  standard  package.  Commodities  that 
are  placed  in  containers,  as  has  been  said,  have  an  added 
cost  for  this  added  service.  And  they  must  meet  the  com- 
petition in  the  market  of  goods  sold  in  bulk.  In  times 
of  high  prices,  competition  of  this  kind  becomes  very 
severe. 

On  the  whole,  however,  there  is  a  very  decided  tendency 
in  the  United  States  toward  placing  goods  in  containers. 
This  method  has  been  found  extremely  useful  by  manufac- 
turers who  plan  to  control  the  marketing  process  of  their 
commodities.  Undoubtedly,  also,  a  better  quality  of  goods 
is  being  marketed  to-day  in  packages  than  formerly  was 
sold  in  bulk.  Either  as  a  result  of  standardizing  and 
identifying  commodities  by  means  of  packages,  or  along 
with  the  development  of  packages,  there  has  been  a  general 
toning-up  in  the  quality  of  goods.  There  is  also  the 
aesthetic  side  to  be  considered  in  regard  to  package  goods. 
In  most  cases,  it  is  possible  to  make  the  package  far  more 
attractive  than  the  commodity  itself  can  be  made.  On  the 
other  hand,  there  are  some  instances  where  a  commodity 
has  special  value  for  display.  This  is  the  case  with  citrus 
fruit.  Some  commodities  are  angular  and  awkard-looking 
in  themselves  and  need  to  be  put  in  neat,  snug  containers. 
This  often  adds  greatly  to  the  advertising  effect  in  the 
eyes  of  the  consumer. 

227.  Identification  of  Commodity. — The  best  weapon 
that  has  been  developed  in  modern  merchandising,  both 
for  defense  and  for  offense,  is  identification.    This  means 


DEFENDING  AND  EXTENDING  THE  MARKET    393 

that  the  name  of  the  maker  and  the  source  of  the  com- 
modity are  known  to  the  consumer.  Obviously  identifica- 
tion carries  along  with  it  certain  responsibilities.  A  manu- 
facturer who  identifies  the  goods  which  he  makes  is  no 
ionger  an  anonymous  producer.  Although  he  may  be 
located  thousands  of  miles  away  from  the  ultimate  con- 
sumer, it  is  possible  readily  and  directly  to  hold  him  re- 
sponsible for  all  defects  either  in  quantity  or  in  quality. 
Ultimately,  the  one  who  identifies  a  commodity,  whether 
producer  or  middleman,  undertakes  the  responsibility 
either  of  good  will  or  of  ill  will. 

On  the  other  hand,  the  identification  of  commodities 
enables  the  producer  and  the  jobber  to  sell  their  own  prod- 
ucts at  long  range.  The  sale  may  be  consummated  either 
by  description  in  a  letter  or  through  general  advertising. 
In  all  national  advertising  campaigns  in  this  country,, 
identification  of  commodities  is  essential. 

Identification  also  secures  to  a  large  extent  the  control 
over  the  distributive  process  by  the  one  who  identifies  the 
commodity.  In  fact,  identification  is  the  most  powerful 
influence  in  modern  merchandising.  It  has  made  the  names 
of  certain  commodities  household  words  from  one  end  of 
the  country  to  the  other.  It  has  announced  to  millions  of 
consumers  the  policy  of  honesty  and  integrity  of  certain 
great  producers.  It  influences  the  buying  habits  of 
millions  of  consumers.  Retailers  have  been  compelled  to 
carry  the  identified  commodities.  It  underlies  the  whole 
system  of  advertising. 

These  two  policies  of  modern  business,  standardization 
and  identification,  have  made  possible  the  large-scale  pro- 
duction for  which  the  United  States  is  known  throughout 
the  world.  The  repetitive  processes  required  for  the  manu- 
facture of  standard  goods  have  called  for  the  wonderful 
development  of  machinery  during  the  past  fifty  years. 
Under  standardization,   output  has  been   immensely  in- 


394  MARKETING 

creased.  The  identification  of  products  which  have  been 
turned  out  by  means  of  standard  processes  has  put  into 
the  hands  of  the  large  producers  a  practical,  controlling 
influence  in  the  marketing  of  many  commodities.  From 
these  two  things,  standardization  and  identification,  all 
modem  marketing  methods  flow. 

Goods  may  be  identified  either  by  producer,  by  whole- 
saler, or  by  retailer.  As  has  been  pointed  out,  here  lies 
the  tremendous  struggle  between  the  large  manufacturers, 
the  large  jobbers,  and  the  large  retailers.  Each  one  de- 
sires to  identify  the  product  which  he  handles.  It  is  not 
possible  for  all  of  them  or  for  any  two  of  them  to  identify 
the  same  product.  They  already  realize,  however,  the 
unlimited  possibilities  for  control  which  lie  in  identification. 
The  manufacturer  understands  that  if  his  name  is  not 
attached  to  the  goods  he  makes,  he  is  an  anonymous  pro- 
ducer, and  that  some  middleman  stands  between  him  and 
the  consumer.  The  jobber  realizes  that  a  large  part  of  his 
power  is  gone  if  he  handles  only  those  commodities  which 
some  one  else  has  identified.  The  retailer  has  discovered 
that  his  importance  is  diminished  if  the  goods  which  he 
handles  are  identified  by  producer  or  jobber.  Out  of  this 
clash  of  interests  has  grown  much  of  the  chaos  in  the  dis- 
tributive process  of  to-day. 

In  general,  goods  may  be  identified  in  either  one  of  two 
ways ;  it  is  possible  also  to  use  both  of  these  methods.  One 
is  to  place  on  the  goods  a  trade  name.  The  other  method 
is  to  place  a  trade-mark  on  the  commodity.  Frequently, 
to-day,  both  a  trade  name  and  a  trade-mark  will  be  found 
on  identified  package  goods. 

228.  Trade  Names. — There  is  no  clear-cut  distinction 
between  trade  names  and  trade-marks,  because  a  trade  name 
may  serve  the  function  of  a  trade-mark.  It  is,  neverthe- 
less, true  that  certain  trade  names  are  used  purely  for  the 
purpose   of   identification,    and   that   in    addition   to   the 


DEFENDING  AND  EXTENDING  THE  MARKET     395 

name  a  certain  marketing  symbol  is  used.  The  object  in 
placing  a  trade  name  upon  the  commodity  is  usually  to 
attract  the  consumer's  good  will  for  the  commodity  to  the 
one  who  has  identified  it  with  a  trade  name.  Thus,  a 
manufacturer  may  place  his  trade  name  on  a  commodity 
and  the  consumer  will  connect  the  producer's  name  with 
the  goods  he  has  bought.  If  the  jobber  and  the  retailer 
place  a  name  upon  goods,  then  the  consumer  will  connect 
them  with  the  commodity. 

Many  kinds  of  trade  names  are  being  used  in  business 
to-day.  They  have  been  derived  from  several  different 
sources.  It  may  be,  for  instance,  the  name  of  the  firm 
itself  that  is  placed  on  the  commodity.  In  other  cases, 
proper  names  and  names  of  places  have  been  used  as  trade 
names.  In  some  cases  there  has  been  a  shortening  of  a 
long  name,  or  the  combining  of  syllables  for  the  making 
of  a  unique  and  attractive  trade  name.  A  common  method 
in  vogue  some  years  ago  was  to  construct  a  diminutive  form 
of  the  name  of  the  commodity  itself.  For  example, 
"Wheatlet,"  "Leatherette,"  and  many  other  such  names 
were  formed  in  this  way.  Occasionally,  compound  words 
have  been  made  up  to  serve  as  trade  names,  such,  for 
example,  as  "Palmolive, "  "Walkover,"  "Spearmint," 
"Meadowgold. "  For  the  purpose  of  attracting  attention, 
there  have  been  deliberate  misspellings  of  words,  as 
"Shure-on,"  "Uneeda,"  "Noxall,"  "E.  Z.  Seal."  Other 
devices  to  secure  a  unique  and  attractive  trade  name  have 
been  used,  such  as  the  initials  of  the  firm,  or  the  construc- 
tion of  a  word  that  has  no  meaning,  or  the  blending  of 
names.  The  only  limit  to  the  sorts  of  trade  names  is  the 
imagination  and  the  ingenuity  of  the  business  man. 

There  is  a  legal  phase  to  consider  in  connection  with  trade 
names.  The  law  has  stipulated  certain  rights  to  use  and  to 
defend  such  names.  For  instance,  it  has  declared  that  a 
man's  name  is  his  own  and  cannot  be  used  without  his 


396  MARKETING 

consent.  Neither  is  it  lawful  to  use  a  name  for  the  pur- 
pose of  injuring  some  one  else.  The  situation  arises  on 
occasion  where  two  producers  have  the  same  name.  If 
one  has  already  established  his  name  in  connection  with 
his  goods,  it  is  not  permissible  for  the  second  to  steal  away 
his  goodwill.  On  the  other  hand,  the  law  recognizes  that 
every  man  has  a  right  to  use  his  own  name  in  his  business. 
He  must  not,  however,  use  that  name  fraudulently.  In 
every  case,  it  is  a  question  of  fraud  that  should  decide, 
that  is  fundamental. 

It  is  furthermore  granted  that  a  man  has  the  right  to 
describe  the  goods  which  he  sells.  A  dealer  is  not  per- 
mitted, therefore,  to  adopt  a  descriptive  adjective  as  his 
trade  name  for  the  purpose  of  preventing  others  from 
using  it.  It  is  even  possible  for  such  a  word  as  a  descrip- 
tive adjective  to  take  on  a  meaning  so  unique  as  to  permit 
of  its  being  used  by  a  business  man  as  a  trade  name  and 
defended  against  all  competitors.  "Where  such  descriptive 
words  have  been  used  as  trade  names,  however,  the  law 
does  not  allow  a  rival  to  use  the  same  words  for  the  pur- 
pose of  deception.  The  burden  of  proof  in  such  an  instance 
is  upon  the  one  who  uses  the  word  as  a  trade  name.  He 
must  show  that  this  particular  word  has  lost  its  descriptive 
significance  and  has  taken  a  well-recognized  designative 
significance.  An  instance  of  a  word  that  fulfills  these  re- 
quirements is  to  be  found  in  ' '  Holeproof. ' ' 

229.  Trade-Marks. — As  generally  defined,  a  trade-mark 
is  a  word,  letter,  device,  or  symbol  or  combination  of  these 
used  in  connection  with  merchandising  and  either  inher- 
ently or  by  association  pointing  distinctly  to  the  origin  or 
ownership  of  an  article  to  which  it  is  applied.  It  has  been 
found  a  convenient  way  of  disclosing  commercial  source, 
or  origin,  of  goods  that  are  sold  in  trade.  Practically, 
a  trade-mark  is  a  symbol  of  business  goodwill.  It  is  there- 
fore not  possible  to  separate  it  from  the  goodwill  which 


DEFENDING  AND  EXTENDING  THE  MARKET    397 

it  represents,  and  that  good-will  in  its  turn  cannot  be  sepa- 
rated from  the  business  to  which  it  is  attached.  It  follows, 
therefore,  that  a  trade-mark  is  inseparable  from  a  busi- 
ness. 

The  trade-mark,  however,  must  be  distinguished  from  a 
copyright  or  a  patent.  A  copyright  gives  the  exclusive  right 
to  multiply  copies  of  a  published  intellectual  work.  A 
patent  "is  the  exclusive  right  to  make,  use,  and  vend  any 
new  and  useful  art,  machine,  manufacture,  or  composition 
of  matter."  Both  copyrights  and  patent  rights  exist  only 
by  power  of  statute ;  also  they  depend  upon  the  creation  or 
invention  of  something  new.  The  right  to  a  trade-mark, 
on  the  other  hand,  is  not  statutory,  but  is  wholly  a  right  of 
common  law,  or  as  modified  by  the  laws  of  the  State. 
The  right  to  a  trade-mark  is  acquired  only  by  priority  of 
adoption,  coupled  with  the  actual  use  of  the  goods  in  the 
market.  To  acquire  such  rights,  the  use  of  a  trade-mark 
need  not  be  extensive.  It  is  enough  if  goods  bearing  the 
trade-mark  are  on  sale  in  the  market.  The  use  of  or  the 
opportunity  to  use  a  trade-marked  commodity,  however, 
must  be  continuous  and  not  merely  casual  and  occasional. 

Since  a  trade-mark  has  for  its  purpose  the  indication  of 
the  commercial  origin  of  a  product,  there  are  certain  re- 
quirements for  its  validity.  Names  that  are  purely  de- 
scriptive are  not  valid  trade-marks  unless  they  have  taken 
on  a  peculiar  and  generally  accepted  significance.  Geo- 
graphical names,  likewise,  cannot  be  used  as  trade-marks 
because  the  right  to  use  them  cannot  be  denied  to  the  pub- 
lic. The  same  criticism  holds  for  the  use  of  personal  names. 
If  the  trade-mark  itself  is  deceptive  or  untrue,  it  is  not 
valid.  It  is  not  permissible  to  use  either  the  national  flag, 
or  that  of  any  state  or  municipality,  or  the  seal  of  the 
national  Ked  Cross,  or  of  any  fraternal  organization,  or 
anything  obscene  or  immoral,  as  a  trade-mark.  The  one 
exception  to  this  principle  is  that  the  law  permits  the  use 


398  MARKETING 

of  trade-marks  that  were  established  before  the  year  1905. 

Valid  trade-marks  should  have  the  following  characteris- 
tics :  they  should  be  affixed,  branded,  or  impressed  upon  the 
article  or  package;  they  should  be  arbitrary  in  character, 
and  not  deceptive ;  they  must  be  used  in  lawful  trade ;  they 
must  be  of  such  a  character  as  to  make  it  possible  for  the 
public  to  distinguish  the  article  from  those  of  all  other 
makers  or  dealers.  The  courts  have  not  yet  decided  whether 
it  is  valid  for  merchants  to  use  the  same  name  on  different 
kinds  of  articles.  The  courts  have  held  that  identical 
trade-marks  should  not  be  used  on  goods  of  such  similar 
character  as  to  afford  an  unfair  use  of  established  good-will, 
or  as  to  cast  any  doubt  upon  the  origin  of  the  goods.  All 
trade-marks  should  be  duly  registered,  but  registration  is 
not  in  itself  positive  proof  of  a  right  to  use  a  trade-mark. 
That  right  rests  solely  upon  the  fact  of  priority  of  use. 

It  is  possible  to  buy  and  sell  trade-marks,  just  as  it  is 
possible  to  buy  and  sell  the  good-will  of  an  establishment. 
In  fact,  certain  trade-marks  have  been  estimated  as  being 
worth  millions  of  dollars.  The  American  Tobacco  Com- 
pany, for  instance,  claimed  that  its  trade-marks  were  worth 
$15,000,000  out  of  a  total  valuation  of  $227,000,000  for  the 
entire  plant.  Other  well-established  trade-marks  have 
been  held  to  be  worth  a  million  dollars  per  letter.  A  cer- 
tain manufacturer  of  soft  drinks  has  estimated  the  value 
of  his  trade-mark  at  $5,000,000. 

The  legality  and  the  effectiveness  of  a  trade-mark  should 
both  be  considered  from  the  point  of  view  of  the  consumer. 
The  point  of  legality  is  decided  by  consideration  of  whether 
or  not  there  is  actually  any  deception  to  a  reasonably  care- 
ful man.  For  effectiveness,  a  trade-mark  must  be  simple, 
easy  to  pronounce,  readily  remembered,  and  sufficiently 
suggestive  to  catch  attention. 

The  number  of  trade-marks  is  rapidly  increasing.  Dur- 
ing the  year  1911,  there  were  7,000  registrations  of  trade- 


DEFENDING  AND  EXTENDING  THE  MARKET    399 

marks.  Twelve  thousand  were  pending  at  that  time.  Ap- 
plications at  the  rate  of  600  per  month  have  been  made  for 
registration.  Generally  from  80  per  cent  to  85  per  cent 
of  the  applications  are  granted.  It  has  been  suggested  that 
there  should  be  a  national  trade-mark  established  for  the 
United  States.  This  suggestion  has  been  approved  by  the 
National  Association  of  Manufacturers,  who  have  adopted 
at  a  recent  convention  a  resolution  urging  the  establish- 
ment of  a  national  trade-mark,  such  as  "Made  in  U.  S.  A." 
The  purpose  in  having  a  national  trade-mark  is  to  prevent 
the  so-called  legalized  piracy  of  private  trade-marks  in 
foreign  markets.  The  most  common  law  to  be  found  in 
foreign  markets  is  one  which  holds  that  the  fact  of  regis- 
tration or  prior  registration  establishes  absolute  right  to  a 
trade-mark.  Many  instances  have  been  known  where  trade- 
marks that  were  established  in  the  United  States  have  been 
registered  by  citizens  in  foreign  markets,  thus  preventing 
the  sale  of  these  well-known  commodities  except  through 
special  dealers  or  by  the  purchase  of  one's  own  trade-mark 
rights  at  a  high  price.  It  is  wise  for  every  business  man 
to  register  his  trade-mark  both  in  the  domestic  and  in  the 
foreign  market. 

230.  Plant  or  Store  as  Appeal  Asset. — There  are  pos- 
sibilities of  appeal  not  only  in  the  goods  themselves,  but 
also  in  the  plant  where  they  are  made  and  in  the  store 
where  they  are  sold.  Manufacturers  and  merchants  in  the 
United  Sates  have  only  recently  awakened  to  the  possi- 
bilities lying  in  the  attractiveness  of  the  plant  or  store  as 
an  aid  in  selling  products.  It  has  been  said  that  the  one 
American  contribution  to  architecture  has  been  the  sky- 
scraper. There  are,  however,  many  manufacturing  plants 
throughout  the  country  that  are  most  attractive  in  appear- 
ance and  in  location.  Some  of  these  have  been  made  into 
show  places  for  all  the  tourists  who  pass  their  way. 

Probably  the  best  example  of  the  effectiveness  of  appeal 


400  MARKETING 

through  the  plant  where  business  is  done,  is  the  bank. 
There  is  an  impression  given,  consciously  or  unconsciously, 
that  the  bank  itself  carries  on  safe  and  sound  business  in 
a  substantial  building.  It  is  for  this  reason  that  one  finds 
a  magnificent  Greek  temple  in  the  business  center  of  some 
of  our  largest  cities.  There  is  no  other  justification  for  the 
great  expense  in  such  an  otherwise  unproductive  structure. 

Not  only  are  there  possibilities  of  appeal  in  the  character 
of  the  plant  or  store,  but  also  in  the  location  of  each.  As 
far  as  a  store  is  concerned,  the  principal  considerations  of 
location  have  to  do  with  (1)  the  accessibility  of  goods; 
(2)  the  mass  psychology  in  the  movement  of  crowds;  (3) 
the  social  class  distinctions;  (4)  the  business  environments. 
Accessibility  of  goods  is  the  most  important  consideration. 
A  great  mass  of  buyers  make  their  purchases  at  the  most 
accessible  place.  There  is  therefore  to  be  considered  the 
relation  of  the  location  to  highways  of  traffic,  the  character 
of  the  passers-by,  the  display  possibilities,  the  largest 
amount  of  natural  light,  and  many  other  minor  factors. 
From  first  to  last,  the  prime  consideration  is  a  possibility 
of  profit.  The  volume  of  trade  and  the  expenses  of  opera- 
tion, including  the  rent,  are  the  essential  items  to  be  an- 
alyzed. 

The  problem  of  location  is  not  the  same  for  the  manu- 
facturer as  for  the  jobber  or  retailer.  Each  must  meet  his 
own  problems  in  his  own  way.  The  manufacturer  can  have 
his  sales  organization  attached  to  his  manufacturing  plant, 
or  established  in  some  trade  center.  The  jobber  needs  to 
have  his  plant  accessible  from  the  point  of  view  both  of  the 
producer  and  of  the  retailer.  The  retailer  must  study  the 
customer.  This  last  is  an  endless  problem.  It  includes  the 
buying  power  of  the  people  and  customs  of  the  people,  the 
character  of  the  local  customers,  the  buying  habits,  the 
rents,  the  corner  location,  the  best  side  of  the  street,  and 
many  more.    All  of  these  factors  will  have  a  different  im- 


DEFENDING  AND  EXTENDING  THE  MARKET    401 

portance  as  they  are  related  either  to  convenience  goods, 
emergency  goods,  or  shopping  lines. 

231.  Potential  Markets. — As  has  been  said,  markets  are 
both  actual  and  potential.  For  a  merchant  to  hold  the 
market  which  he  now  has,  is  a  question  of  defense.  The 
problem  of  increasing  sales,  of  reaching  new  markets,  is 
one  of  offense.  Standard  goods  that  are  identified  by  trade 
names  or  trade-marks  can  be  used  in  both  defense  and  of- 
fense. The  extension  of  a  market,  however,  either  inten- 
sively or  extensively,  requires  a  careful  analysis  of  buying 
habits  and  purchasing  power.  A  recent  investigation  into 
buying  habits  that  was  made  by  a  large  newspaper  contains 
the  following  statement:  "The  merchandising  service  of 
this  newspaper  is  able  to  put  its  fingers  on  the  101  items 
of  knowledge  that  determine  why  people  buy  and  why 
they  don't."  Knowledge  of  this  sort  is  absolutely  essen- 
tial in  laying  out  plans  for  extending  the  market. 

Before  a  plan  is  made  for  reaching  out  into  new  terri- 
tory or  for  developing  the  territory  already  covered,  a 
careful  analysis  should  be  made  of  the  possibilities  for 
such  extension.  An  investigation  was  recently  made  by  the 
research  department  of  a  large  publishing  house  as  to  the 
potential  market  for  farm  tractors.  It  was  assumed  that 
no  farm  of  less  than  100  acres  could  afford  a  farm  tractor. 
It  was  found  from  the  last  census  report  that  there  were 
a  certain  number  of  farms  in  the  country  containing  from 
100  acres  to  174  acres.  There  was  another  division  of 
farms  including  all  those  of  175  acres  and  above.  It  was 
further  found  that  the  first  group  made  up  24  per  cent  of 
the  farms  in  the  country.  The  latter  group  included  18 
per  cent  of  the  total  number.  It  was  then  assumed  that 
one  out  of  every  five  of  the  first  group  of  farms  afforded 
a  potential  sale  and  that  three  out  of  every  five  in  the  latter 
group  afforded  opportunities.  A  calculation  was  also  made 
as  to  the  number  of  farms  that  could  support  two  tractors. 


402  MARKETING 

It  was  concluded  that  the  total  of  these  three  groups  con- 
stituted the  entire  possible  market  in  the  United  States  for 
the  tractor.  Figures  were  then  found  as  to  the  number  of 
tractors  that  had  been  sold.  The  final  step  was  easy  in 
determining  the  extent  of  the  potential  market. 

A  careful  analysis  of  this  sort  is  essential  for  the  plan- 
ning of  any  extension  of  market.  It  is  possible,  however, 
to  secure  data  upon  which  a  safe  policy  may  be  based. 

Suggestions  for  Study 

The  student  should  at  this  point  analyze  the  possibilities 
for  extending  the  market  of  the  commodity  which  he  has 
under  special  investigation.  The  following  subjects  will 
serve  for  class  discussion : 

Finding  the  Selling  Points 

1.  Selling  points  and  business  imagination. 

2.  Selling  points  and  business  analysis. 

3.  Selling  points  and  creative  work. 

4.  Selling  points  and  business  integrity. 

5.  Selling  points  as  related  to  the  consumer. 

6.  After  all,  what  are  selling  points? 

The  Appearance  of  the  Commodity  Unit 

1.  A  critical  examination  of  the  commodity  unit. 

2.  Commercial  considerations  connected  with  the  unit. 

3.  Protection  against  competitors. 

4.  The    commodity   unit    as    related   to   the   identification    of 
goods. 

5.  Packages  and  advertising  possibilities. 

6.  The  commodity  unit  and  "service." 

7.  The  "new  idea"  in  packages. 

8.  The  commodity  unit  as  modified  by  character  of  goods,  by 
consumer  demand,  and  by  price. 

9.  Standardizing  the  commodity. 


DEFENDING  AND  EXTENDING  THE  MARKET    403 

Trade  Names 

1.  The  origin  of  the  trade  name. 

2.  The  commercial  function  of  the  trade  name. 

3.  Legal  rights  to  use  trade  names. 

4.  Limitations  to  use  of  trade  names. 

5.  The  trade  name  and  good-will. 

6.  Things  to  be  considered  in  selecting  the  trade  name. 

7.  Advertising  value  of  a  trade  name. 

Trade-Marks 

1.  Trade-marks,  vs.  trade  names. 

2.  Origin  and  development  of  trade-marks. 

3.  Trade-marks  and  distributive  problems. 

4.  Registered  trade-marks. 

5.  Trade-mark  restrictions. 

6.  Trade-mark  infringements. 

7.  Trade-marks  and  the  consumer. 

8.  Trade-marks  and  the  fixed  price  problems. 

Readings  : 

Calkins,  Business  of  Advertising,  pp.  202-67,  166-173,  159-166. 

Bunting,  Elementary  Laws  of  Advertising,   Chap.  VII. 

Hall,  Writing  an  Advertisement,  Chap.  VIII. 

Library  of  Business  Practice,  Chaps.  II  and  III. 

Printer's  Ink,  Sept.  5,  1912,  "Playing  up  the  Trade-Mark"; 
September  19,  1912,  "When  Copy  Finds  Points  of  Con- 
tact"; September  26,  1912,  "New  Uses  for  Common  Prod- 
ucts." 

Chapman,  Law  of  Advertising  and  Sales,  Chap.  XLIV. 

System,  December,  1912,  "Packing  to  Save  Freight." 

Advertising  and  Selling,  May,  1913,  "Advertising  Possibilities 
of  the  Package." 

Printer's  Ink,  August  22,  1912,  "What  Is  a  Good  Package?"; 
July  8,  1913,  "How  Closely  May  Labels  Resemble  Each 
Other?";  August  7,  1913,  "Adding  Life  to  the  Display  of  the 
Package";  May  29,  1913,  "The  Value  of  a  Special  Holiday 


404  MARKETING 

Package,"  June  26,  1913,  "Vitalizing  the  Display  of  the 
Package." 

Brisco,  Economics  of  Enterprise,  Chaps.  XIV  and  XV. 

Tipper,  Hotchkiss,  etc.,  Principles  and  Practices  of  Advertis- 
ing, Chap.  XVI. 

Mahin,  Advertising  Data  Book,  pp.  391-402,  and  Chap.  XVI. 

Printer's  Ink,  April  24,  1913,  "Fighting  Unfair  Use  of  Place 
Names";  May  8,  1913,  "Deceptive  Use  of  Personal  Names"; 
May  22,  1913,  "Deceptive  Use  of  Descriptive  Names";  May 
22,  1913,  "Deceptive  Use  of  Trade  Names  That  Have  Be- 
come Common  Names." 

Chapman,  Law  of  Advertising  and  Sales,  Chaps.  XXXVII- 
XLIII. 

Rogers,  Good  Will,  Trade-Marks,  etc.,  Part  II,  Chap.  XXVI. 

Calkins  and  Holden,  Modern  Advertising,  p.  126,  pp.  197-207. 

Cherington,  Advertising  Book,  1916,  Chap.  XIII 

Printer's  Ink,  August  29,  1912,  "High  Cost  of  Careless  Trade- 
Marking"  ;  March  13,  1913,  "Why  You  Buy  or  Sell  a  Trade- 
Mark,"  "What  to  Avoid  in  Selecting  a  Trade-Mark";  No- 
vember 27,  1913,  p.  56,  "Viewpoint  of  Government  in  Close 
Trade-Mark  Cases." 

De  Bower,  Advertising  Principles,  Chap.  XIX. 


CHAPTER  XIX 

THE   SALES   ORGANIZATION 

232.  The  Importance  of  a  Sales  Organization. — For  the 

manufacturer,  the  wholesaler,  and  the  retailer  there  is  a 
sales  problem,  essentially  the  same  in  character,  but  dif- 
fering in  the  more  superficial  aspects.  The  manufacturer 
wants  to  reach,  or  at  least  to  meet,  the  middleman  who  is 
to  handle  his  goods,  or  the  consumer  who  is  to  use  them,  or 
both.  It  must  be  remembered  that  the  beginning  and  the 
end  of  every  manufacturing  activity  practically  is  a  mer- 
chandising problem;  the  manufacturer  must  buy  and  tho 
manufacturer  must  sell.  There  is  for  him  a  problem  of 
sales  management  and  sales  organization.  The  wholesaler 
likewise  must  have  his  sales  organization,  as  well  as  his 
purchasing  department.  For  the  retailer,  the  sales  or- 
ganization is  one  of  his  chief  concerns. 

No  matter  how  individual  the  problems  of  a  given  estab- 
lishment may  be,  through  them  all  runs  a  common  element 
of  human  psychology.  In  the  problem  of  labor  manage- 
ment, the  human  element  very  largely  predominates.  "With 
the  merchant,  there  is  the  task  of  selecting  men  to  go  out 
and  represent  his  business  to  the  world.  "Within  the  estab- 
lishment, there  is  the  sales  force  that  meets  the  customers 
as  representatives  of  the  house.  This  is  a  highly  important 
task.  It  is  largely  a  matter  of  temperament  with  which 
the  merchant  has  to  deal.  The  generalization  is  probably 
accurate  that  salesmen  are  more  temperamental  than  me- 
chanics or  the  clerks  in  an  office.  This  fact  complicates 
the  problem  of  selection. 

405 


406  MAKKETING 

In  every  mercantile  establishment  of  size,  therefore,  there 
is  a  house  or  store  policy.  This  means,  as  has  been  said, 
the  individual  way  of  doing  business.  That  is,  the  terms 
to  be  offered  to  a  customer,  the  means  to  create  a  good  name 
for  the  house,  and  the  general  method  of  dealing  with 
customers.  Whatever  this  policy  may  be,  it  is  carried 
out  in  actual  practice  through  the  sales  force.  There  is, 
therefore,  a  distinct  need  for  training  the  sales  force 
adequately. 

Every  business  house  of  consequence  is  like  a  machine 
in  that  it  must  have  its  parts  fitly  joined  together.  They 
must  be  coordinated.  The  business  must  be  well  balanced. 
In  this  fact  lies  the  need  for  organizing  the  sales  force. 
The  merchant,  who  has  been  financier  and  diplomat,  must 
now  become  a  sales  manager. 

233.  The  Sales  Manager. — Somewhere  in  the  selling 
process  there  must  be  a  human  factor,  a  salesman.  Even 
a  mail-order  house  must  have  its  sales  organization.  The 
function  of  sales  management,  therefore,  is  essential,  and 
some  one  must  perform  the  service  of  a  sales  manager. 
Where  selling  is  done  at  long  range,  by  mail  or  by  adver- 
tising, an  advertising  manager  appears.  As  an  establish- 
ment increases  in  size,  there  come  to  be  distinguished  four 
separate  functions,  that  of  the  production  manager,  that 
of  the  finance  manager,  that  of  the  sales  manager,  and  that 
of  the  administrator.  Of  these  four  managers,  the  sales 
manager  faces  directly  the  selling  problem. 

The  selling  problem  for  the  sales  manager  will  be  condi- 
tioned by  the  management's  policies,  by  the  character  of 
the  commodity,  by  financial  considerations  and  by  the  gen- 
eral sales  plan.  Whatever  the  manager  does  must  be  in 
accordance  with  the  house  policy.  In  case  the  commodity 
is  in  universal,  or  at  least  widespread,  demand,  the  prob- 
lem is  one  of  organizing  for  detail  of  operations  and  the 
best  use  of  time.    When  the  consumer  must  be  instructed 


THE  SALES  ORGANIZATION  407 

or  the  territory  is  to  be  sold  intensively,  the  problem  is 
one  of  technique  and  finesse,  of  care  as  to  detail. 

The  sales  manager  works  through  the  sales  organiza- 
tion, which  may  be  made  up  of  an  advertising  department, 
an  internal  sales  force,  and  a  traveling  sales  force.  He 
has,  in  consequence,  the  task  of  organizing  and  adminis- 
tering, of  selecting  salesmen,  of  training  salesmen,  and  of 
generally  coordinating  the  selling  forces.  "Where  com- 
plete organization  is  possible,  it  has  been  suggested  that 
the  sales  organization  should  be  divided  into  a  personnel 
department,  an  advertising  department,  a  sales-promotion 
department,  and  a  recording  department. 

234.  Personnel  Department. — The  personnel  department 
in  mercantile  establishments,  as  well  as  in  industrial  es- 
tablishments, is  a  new  development.  The  term  is  a  bor- 
rowed one  used  to  cover  many  different  activities.  From 
a  general  point  of  view,  however,  these  activities  are  all 
concerned  with  a  certain  definite  function.  This  function 
is  to  select,  train,  educate,  and  dismiss  the  sales  force.  Only 
a  comparatively  large  business  can  afford  to  establish  a 
personnel  department.  In  smaller  concerns,  its  functions 
must  be  performed  in  connection  with  others.  A  distinct 
department  of  this  sort  marks  a  high  degree  of  speciali- 
zation in  function.  The  specific  problems  with  which  a  per- 
sonnel department  deals  are  selecting  the  sales  force,  train- 
ing salesmen,  holding  sales  conventions,  and  disciplining 
and  dismissing  salesmen.  Each  of  these  separate  functions 
will  be  discussed  individually. 

235.  Selecting  the  Sales  Force. — The  selection  of  em- 
ployees in  both  commercial  and  industrial  establishments  is 
fast  becoming  a  profession  in  itself.  Since  it  is  funda- 
mentally a  matter  of  human  relationship,  the  science  of 
psychology  has  been  of  great  assistance.  There  are,  for 
instance,  certain  psychological  tests  which  are  made  of 
all   applicants  for  positions.     Naturally,  these   tests  will 


408  MARKETING 

differ  in  character  for  the  selection  of  salesmen  from  those 
used  in  the  selection  of  a  working  force  in  a  factory.  Some 
tests  that  are  applied  in  the  selection  of  salesmen  are  those 
of  manners,  appearance,  indications  of  intelligence,  good 
breeding,  neatness  and  attractiveness  of  dress,  and  certain 
observation  tests  as  to  the  action  of  the  applicant  during 
the  interview.  These  tests  vary  with  the  establishments 
and  the  types  of  management.  As  a  matter  of  fact,  there  is 
no  limit  to  the  tests  that  can  be  made.  Whatever  makes 
up  the  composite  of  personal  impression  will  be  used  con- 
sciously or  unconsciously  in  selecting  salesmen.  The  stories 
that  were  written  years  ago  of  well-dressed  office  boys  who 
secured  jobs  in  competition  with  others  and  later  became 
presidents  or  general  managers  have  become  out  of  date. 
To-day,  the  method  is  to  apply  scientific  principles  to  this 
difficult  task.  The  management  usually  requires  every  ap- 
plicant to  state  his  previous  training  and  experience,  as 
well  as  to  give  references  to  reliable  men  who  can  speak 
authoritatively  about  him. 

In  selecting  salesmen,  there  are  in  general  two  main 
problems.  There  is  the  task  of  securing  a  competent,  effi- 
cient inside  force.  These  are  the  salesmen  in  the  store. 
They  will  differ  in  type  and  possibly  in  training  from  those 
who  meet  prospective  customers  outside  the  store.  In 
many  respects,  the  selection  of  a  sales  force  within  the 
establishment  is  a  distinct  problem  in  itself.  The  other 
phase  of  the  selection  problem  is  the  traveling  salesmen. 
This  type,  which  has  developed  along  the  lines  peculiar  to 
the  United  States,  has  come  into  existence  since  the  period 
of  the  Civil  War.  The  wholesalers  found  it  necessary  be- 
cause of  competition  to  send  out  representatives  who  trav- 
eled from  place  to  place  and  took  orders  from  the  retailers. 
This  type  of  salesman  has  continued  to  the  present  time. 
The  outside  force  may  be  drawn  from  the  inside  force, 
the  previous  training  of  the  men  having  taken  place  within 


THE  SALES  ORGANIZATION  409 

the  store.  In  no  case  is  the  traveling  salesman  competent 
to  carry  on  his  task  until  he  knows  the  house  policy  and 
the  problems  inside  the  establishment.  Even  more  than 
the  salesman  in  the  store,  the  traveling  salesman  is  the 
personal  representative  of  the  business.  His  activities  can- 
not be  controlled  by  the  management.  He  must  be  left 
largely  to  his  own  discretion.  Decisions  must  be  made  by 
him  without  consultation.  What  he  does  and  what  he 
says  is  largely  on  his  own  initiative.  This  fact  makes  the 
selection  of  traveling  salesmen  a  very  important  one. 

236.  Training  the  Sales  Force. — The  training  of  sales- 
men is  also  a  recent  development.  It  has  generally  been  con- 
sidered that  anybody  can  go  into  business  with  practically 
equal  prospects  of  success.  No  hurdles,  such  as  special 
training,  examinations,  licenses,  or  diplomas,  have  been 
put  in  the  way  of  salesmen,  as  is  true  of  most  professions. 
In  fact,  salesmanship  has  not  been  a  profession  in  the  past. 
To-day,  however,  more  and  more  training  is  required  of 
the  successful  salesman.  This  training  may  be  given  either 
by  the  establishment  itself  or  by  outside  agencies. 

Many  stores  require  a  period  of  apprenticeship  before  a 
salesman  is  considered  a  member  of  the  sales  force.  Even 
to  take  care  of  the  Christmas  trade,  most  large  stores  will 
require  that  the  extra  salespeople  shall  pass  through  a 
brief  apprenticeship  of  training.  Usually  this  training  con- 
sists of  instructions  in  the  use  of  various  blanks  and  the 
sales  forms,  in  special  sales  methods  of  the  various  de- 
partments, and  in  a  demonstration  of  how  sales  are  made. 
There  are  also  some  simple  tests  in  arithmetic,  and  various 
instructions  as  to  personal  appearance,  ways  of  meeting 
customers,  and  general  deportment.  Classes  are  sometimes 
organized  in  larger  stores  for  the  study  of  salesmanship 
problems.  There  are  department  stores  that  offer  con- 
secutive courses  in  training  for  salesmanship.  These  stores 
have  a  special  room  fitted  up  to  be  used  as  a  class  room, 


410  MARKETING 

with  a  library  in  connection  with  it  and  a  librarian-teacher 
in  charge.  The  younger  members  of  the  force,  the  appren- 
tices, and  others  who  are  ambitious  to  become  more  pro- 
ficient are  invited  to  join  these  classes. 

The  subject  matter  of  the  training  given  by  the  estab- 
lishment itself  is  varied  in  character.  In  general,  it  will 
have  to  do  with  the  policy  of  the  house,  a  knowledge  of 
merchandising  and  a  stimulation  of  interest  in  the  goods, 
certain  technical  knowledge  of  materials  and  manufactur- 
ing, and  special  instruction  in  methods  of  making  sales. 
Part  of  the  course  will  usually  deal  with  distinctively  de- 
partmental training.  There  is,  for  instance,  the  subject 
of  home-decorating  for  salesmen  in  the  departments  han- 
dling pictures,  rugs,  wall-paper,  furniture,  and  so  on. 
Some  knowledge  of  good  taste  or  harmonious  colors,  of  the 
latest  designs,  and  of  the  most  popular  fashions,  will  be 
imparted. 

There  is  another  phase  of  training  for  the  salesman 
that  deals  with  the  problem  of  meeting  the  customers.  In 
general,  this  training  consists  of  ways  of  being  useful  to 
the  customer  in  suggesting  or  advising  as  to  what  should 
be  bought.  There  is,  or  should  be,  an  insistence  upon  ac- 
curacy of  statement  and  of  honesty  in  dealing  with  custom- 
ers. As  the  movement  for  training  salesmen  develops,  the 
old-time  tricks  of  the  trade  are  being  discredited.  Earlier 
methods  of  leading  the  customer  on,  methods  of  managing 
him  and  securing  his  consent  are  no  longer  taught.  Much 
is  said,  however,  about  the  subject  of  reading  character. 
Different  customers  must  be  dealt  with  in  different  ways. 
This  is  not  only  true  in  the  matter  of  salesmanship,  but 
also  in  every  other  kind  of  human  contact.  And  knowledge 
of  character,  of  ways  of  pleasing,  and  of  lubricating  all 
human  contact  are  desirable  both  in  the  matter  of  sales- 
manship and  in  general  intercourse. 

The  training  of  salesmen  also  is  placing  the  emphasis 


THE  SALES  ORGANIZATION  411 

upon  the  need  of  knowing  the  business.  There  are  tech- 
nical matters  that  are  connected  with  every  kind  of  busi- 
ness which  should  be  learned  thoroughly.  There  is  need 
also  that  the  salesman  should  analyze  the  merchandise 
which  he  sells  in  its  relation  to  human  wants.  The  sales- 
man needs,  moreover,  a  knowledge  of  economic  principles. 
He  needs  a  broad  education  so  that  he  may  understand 
more  thoroughly  the  services  which  he  is  to  perform.  It  is 
a  part  of  the  salesman's  duty  to  educate  the  customers  to 
new  wants.  He  should  be  taught  in  his  preliminary  train- 
ing how  this  may  be  done. 

There  have  developed  in  recent  years  methods  of  making 
sales  which  are  generally  called  sales  talks.  Several  writ- 
ers on  this  subject  claim  it  is  possible  to  teach  the  salesman 
a  standard  sales  talk  which  he  can  apply  on  all  occasions 
in  selling  the  merchandise  that  he  handles.  It  is  obviously 
a  superficial  and  parrot-like  method  of  training  salesmen. 
A  far  better  way  is  to  teach  the  salesman  how  to  meet 
situations,  how  to  use  the  information  that  he  possesses 
under  all  circumstances.  Sales  cannot  and  should  not  be 
made  wholly  by  the  book.  Human  contact  cannot  be  stand- 
ardized. No  engineer  can  be  taught  in  the  engineering 
school  a  standard  practice  for  all  the  problems  which  he 
is  to  meet.  The  same  is  true  of  the  salesman.  Indepen- 
dent thinking,  independence  of  action,  honesty  and  in- 
tegrity of  character,  and  thorough  knowledge  of  merchan- 
dise are  much  more  important  equipment  than  any  stand- 
ard sales  talk. 

The  business  colleges,  which  began  to  develop  in  the 
United  Staes  just  prior  to  the  middle  of  the  last  century, 
for  the  purpose  of  applying  mechanical  devices  to  the  office 
tasks  in  rapidly-growing  establishments,  later  extended 
their  courses  to  include  salesmanship.  Beginning  with 
typewriting  and  stenography,  they  broadened  their  instruc- 
tion to   include  business  arithmetic,  spelling,   and   punc- 


412  MARKETING 

tuation,  and  a  study  of  the  selling  problem.  Many  courses 
in  salesmanship  are  now  offered  throughout  the  country 
by  these  institutions. 

In  the  public  schools  and  especially  in  the  high  schools, 
the  demand  for  training  in  salesmanship  has  been  reflected 
by  the  installing  of  such  courses.  The  subject  matter  of 
most  of  these  has  to  do  with  appearance,  deportment,  meth- 
ods of  making  sales.  As  the  subject  has  been  studied,  how- 
ever, the  instruction  has  become  better,  and  a  deeper  knowl- 
edge has  been  made  possible.  The  real  question  behind  this 
offering  of  salesmanship  courses  in  public  schools  is  whether 
or  not  the  burden  for  training  apprentices  should  thus  be 
placed  upon  the  public. 

The  same  movement  for  business  training  has  been  re- 
flected in  courses  offered  by  colleges  and  universities.  The 
past  few  years  have  seen  the  development  of  many  schools 
of  business  administration  in  the  universities  of  the  coun- 
try. In  these  schools,  there  are  courses  devoted  to  the  sub- 
ject of  salesmanship.  Generally,  however,  it  is  recognized 
that  salesmanship  is  a  broader  problem  than  merely  a  mat- 
ter of  making  a  sale.  It  should  become  a  profession  in  it- 
self. Many  subjects  need  to  be  studied.  The  most  funda- 
mental of  these  is  undoubtedly  the  principles  of  economics. 
The  course  should  include  also  subjects  in  marketing,  in 
business  correspondence,  in  psychology,  in  accounting,  and 
many  other  allied  subjects. 

Often  special  courses  are  offered  by  companies  that  ex- 
pect to  sell  their  product  direct  from  the  factory  to  the 
consumer,  to  the  young  men  and  women  who  have  a  long 
summer  vacation  which  they  desire  to  make  profitable. 
These  courses  consist  very  largely  of  standard  sales  talks 
and  deal  particularly  with  the  commodity  or  line  of  goods 
which  the  company  has  for  sale.  The  training  very  natu- 
rally is  superficial.  The  personnel,  however,  which  such 
companies  secure  from  the  colleges  and  high  schools  is  of  a 


THE  SALES  ORGANIZATION  413 

quality  much  above  the  average,  and  many  companies  have 
found  this  method  extremely  successful. 

237.  Holding  Sales  Conventions. — Sales  conventions  are 
frequently  held  for  the  discussion  of  problems  common  to 
salesmen.  These  are  largely  the  result  of  an  organization 
of  salesmen  who  have  mutual  interests.  The  purpose  is  to 
discuss  the  many  problems  which  they  have  in  common, 
and  to  make  of  the  convention  a  kind  of  experience  meet- 
ing. The  social  element  is  a  large  factor  in  these  con- 
ventions. The  salesmen  often  come  back  from  them  with 
many  new  ideas.  The  speakers  are  largely  men  who  have 
achieved  success.  There  are  better  efforts  on  the  part  of 
the  salesmen  as  a  result  of  the  spirit  of  emulation  which 
is  assimilated  at  these  conventions. 

238.  Disciplining  the  Sales  Force. — It  is  necessary  for 
the  manager  of  the  personnel  department  to  discipline  the 
salesmen  who  are  under  his  control.  As  has  been  said, 
the  salesman  is  temperamental;  "the  fundamental  prob- 
lems of  sales  organization  are  not  mechanical,  but  mental ; 
not  physical,  but  psychological."  It  is  necessary,  there- 
fore, to  give  a  looser  rein  to  salesmen  than  to  tool-makers 
or  mechanics  or  the  clerical  force.  Nevertheless,  the  sales 
organization  must  be  loyal  to  the  house  and  to  its  policies. 
All  salesmen  must  be  held  in  check,  so  that  their  efforts 
can  be  directed  by  the  manager.  Undoubtedly,  the  best 
control  of  a  sales  organization  is  secured  by  developing 
good  will  on  the  part  of  all  salesmen  through  fair  treatment 
on  the  part  of  the  management.  When  a  salesman,  how- 
ever, becomes  obstructive  or  has  shown  his  incapacity,  the 
manager  must  dismiss  him. 

239.  Advertising  Department. — Of  equal  importance 
with  the  personnel  department  is  that  of  the  advertising 
manager ;  his  duty  is  to  prepare  the  advertising  campaigns 
which  the  company  decides  upon.  He  must  have  charge 
of  the  bulletins  and  he  must  be  responsible  for  the  house 


414  MARKETING 

organs  which  are  published.  All  publicity  campaigns  are 
under  his  direct  control.  More  will  be  said  of  the  adver- 
tising manager  and  his  particular  duties  in  a  later  section 
of  this  chapter. 

240.  Sales-Promotion  Department. — The  active  policy  of 
a  mercantile  establishment  will  manifest  itself  in  a  depart- 
ment whose  duty  it  is  to  extend  the  business  of  the  com- 
pany. This  function  may  be  undertaken  by  a  special  de- 
partment which  has  been  called  the  sales-promotion  depart- 
ment. The  specific  functions  of  such  a  department  are  to 
analyze  the  market  for  the  purpose  of  directing  sales,  to 
afford  the  testing  of  new  ideas,  the  securing  of  informa- 
tion, the  analyzing  and  presenting  of  information  to  the 
sales  manager.  The  function  of  sales  promotion,  however, 
may  be  the  joint  effort  of  various  employees  under  the  sales 
manager. 

241.  Keeping  Records. — It  is  necessary  for  intelligent 
effort  that  records  of  achievement  should  be  kept  in  such 
manner  as  to  render  them  immediately  available.  The 
keeping  of  records,  therefore,  is  a  distinct  function  in  itself. 
If  the  volume  of  business  done  by  the  company  is  great 
enough  to  justify  it,  this  task  may  be  given  to  a  separate 
department.  If  this  is  done,  the  specific  activities  of  such 
a  department  would  be  the  determination  of  sales  quotas, 
the  inspection  of  orders,  the  checking  up  of  expense,  the 
adjustment  of  salaries,  the  giving  of  commissions  and 
bonuses.  The  solution  of  all  problems  of  remuneration  can 
logically  come  only  from  the  true  records  of  activities. 
Many  sales  managers  have  found  it  a  wise  policy  to  keep 
the  records  of  the  salesmen  in  some  public  fashion,  such  as 
a  chart  or  graph  on  the  wall,  in  order  to  stimulate  rivalry 
among  the  force.  In  such  a  case,  every  man  is  judged  on 
the  basis  of  his  own  achievement.  The  material  for  the 
construction  of  such  charts  would  come  from  the  records 
department. 


THE  SALES  ORGANIZATION  415 

242.  Coordinating  the  Force. — The  real  task  of  the  sales 
manager  is  to  organize  the  sales  force  in  such  a  way  that 
all  the  parts  are  working  together.  One  of  the  most  diffi- 
cult problems  in  coordination  is  the  relation  of  the  sales 
manager  to  the  advertising  manager.  The  usual  practice 
is  for  the  sales  manager  to  be  the  superior  officer.  Some- 
times, however,  the  two  are  of  equal  importance  in  the  or- 
ganization, each  working  independently  of  the  other  and 
both  responsible  for  their  actions  to  the  general  manager. 
In  such  a  case,  it  is  the  duty  of  the  general  manager  to  co- 
ordinate the  sales  force.  It  has  been  found  frequently 
that  the  sales  manager  and  the  advertising  manager  work 
at  cross  purposes.  There  has  been  jealousy  of  authority, 
of  power,  and  of  results.  As  a  matter  of  fact,  the  adver- 
tising manager  has  had  to  fight  his  way  to  recognition. 

Advertising,  however,  is  one  form  of  salesmanship.  The 
advertising  manager  is  a  salesman.  In  some  way  or  other, 
by  means  of  organization,  all  advertising  effort  must  be 
coordinated  with  the  sales  effort  through  salesmen.  Be- 
hind advertising  also  must  be  the  house  policy  and  the 
general  sales  policy.  The  character  of  the  commodity  will 
likewise  be  a  large  factor  in  determining  the  character  of 
advertising.  The  market,  too,  is  an  essential  consideration. 
The  problem  of  the  commodity  in  its  relation  to  the  mar- 
ket is  a  common  problem  for  the  entire  sales  department 
and  is  in  no  way  confined  to  advertising. 

It  may  be  said,  in  general,  that  advertising  sells  to  peo- 
ple in  large  groups,  while  the  salesman  deals  individually. 
The  difference  in  method  has  been  compared  to  the  use  of 
a  rifle  as  contrasted  with  that  of  a  shotgun.  The  salesman 
aims  at  individuals,  the  advertiser  at  the  mass.  As  has 
been  said,  "The  salesman  appeals  to  the  man,  the  adver- 
tiser to  men." 

The  primary  duty  of  the  sales  manager,  therefore,  is  to 
coordinate  all  sales  forces  and  to  concentrate  them  upon  a 


416  MAKKETING 

definite  plan.  This  manager  must  prepare  the  plans  and 
must  administer  them.  The  inside  sales  force,  the  traveling 
salesmen,  and  the  advertising  manager  must  all  work  har- 
moniously toward  a  common  end.  Otherwise,  there  can 
be  no  effective  sales  organization. 

243.  Advertising  Manager. — Advertising  has  recently 
become  a  recognized  profession.  The  work  of  the  adver- 
tiser is  only  just  now  defining  itself.  In  general  outline, 
it  can  be  defined  as  follows. 

In  the  first  place,  the  advertising  manager  must  adjust 
the  goods  to  the  market  which  he  is  to  reach.  The  first 
requirement  is  that  he  shall  know  how  to  sell.  By  carrying 
his  practical  salesman's  knowledge  into  advertising,  he 
can  make  his  campaigns  far  more  effective. 

The  general  requirement  of  the  advertising  manager  is 
that  he  shall  have  business  imagination.  This  means  that 
he  must  have  a  vision  of  the  program  which  he  is  to  carry 
out  in  its  relation  to  the  public.  Behind  this  vision,  how- 
ever, there  must  be  an  adequate  knowledge  of  the  facts 
of  business.  The  advertising  man,  like  the  salesman,  should 
be  versed  in  the  internal  problems  of  the  business,  in  the 
competition  which  the  business  must  meet,  in  the  attitude 
of  the  dealers  who  handle  the  goods.  Like  the  sales  man- 
ager, also,  the  advertising  manager  must  be  a  successful 
administrator.  That  is,  he  must  see  that  the  policy  which 
he  adopts  is  actually  carried  through. 

It  is  a  part  of  the  task  of  the  advertising  manager  to 
outline  the  general  sales  campaign.  He  needs  help  often 
from  the  sales  manager,  but  he  must  have  final  authority 
in  the  selection  of  media  and  in  the  construction  of 
1 '  copy. "  ' '  Ninety-nine  out  of  100  good  advertisements  are 
an  evolution  and  not  an  inspiration."  It  is  necessary  that 
the  advertising  manager  have  initiative.  Imagination  will 
be  of  little  service  unless  the  advertising  manager  has  suffi- 
cient aggression  to  make  it  materialize.     Generally  speak- 


THE  SALES  ORGANIZATION  417 

ing,  the  advertising  man  is  the  experimenter  in  the  busi- 
ness organization.  His  mind  is  constantly  seeking  new 
methods  of  reaching  the  market.  He  is  searching  daily  for 
new  appeals.  If  he  is  of  the  right  type,  he  will  abstract 
himself  from  the  business  and  study  the  whole  problem 
from  an  impersonal  point  of  view.  It  is  ability  to  do  this 
which  has  given  independence  of  thinking  to  the  advertis- 
ing manager. 

Like  the  other  salesmen,  he  needs  a  special  course  of 
training.  He  should,  of  course,  first  study  the  product  or 
line  of  goods  which  he  is  to  sell.  He  should  be  able  to  evolve, 
to  originate,  and  to  formulate  effective  selling  arguments. 
He  must  also  have  a  thorough  knowledge  of  the  value  of 
newspapers,  magazines,  and  other  means  of  reaching  the 
public.  "The  publisher  can  guarantee  that  his  paper  has 
a  certain  circulation,  but  he  cannot  guarantee  that  your 
advertisements  will  be  read. "  It  is  a  part  of  the  task  of  the 
advertising  man  to  be  an  expert  judge  of  the  value  of  space. 
As  a  matter  of  practice,  many  advertising  managers  have 
developed  from  the  sales  force.  These  have  been  the  men 
with  those  peculiar  characteristics  which  advertising  de- 
mands. A  great  many  advertising  managers  have  come 
over  from  newspaper  work.  "As  a  matter  of  fact,  no  busi- 
ness experience  is  without  value  to  one  in  the  advertising 
business.  The  closer  he  has  come  to  selling  conditions,  the 
better  advertising  man  he  makes.  It  is  a  mistake  to  assume 
that  writing  ability  and  a  knowledge  of  type  are  an  adver- 
tising man's  requirements." 

244.  Advertising  Agency. — In  case  the  business  is  not 
large  enough  to  justify  an  advertising  department  of  its 
own,  these  functions  may  be  performed  by  an  outside 
agency.  There  are  in  the  country  a  great  many  advertis- 
ing agencies  which  act  as  advertising  managers  for  busi- 
ness firms.    The  origin  of  these  agencies  was  that  of  space 


418  MARKETING 

brokers.     The  original  advertising  men  bought  and  sold 
space  in  magazines  and  newspapers. 

It  is  for  this  reason  that  emphasis  has  been  laid  upon  the 
ability  of  the  advertising  man  to  know  the  value  of  various 
newspapers  and  magazines  as  a  medium  for  advertising.  It 
is  necessary  for  the  agency  also  to  furnish  expert  knowl- 
edge of  such  things  as  population,  circulation,  climate,  and 
superiority  of  morning  newspapers  over  evening  newspa- 
pers, or  vice  versa. 

From  the  function  of  the  old-time  agency  which  was 
to  solicit  accounts,  new  agencies  have  developed  which  are 
headed  by  real  business  experts.  They  are  in  fact  profes- 
sional men.  It  is  also  important  to  observe  that  these  agen- 
cies become  more  and  more  proficient  as  they  accumulate 
facts  and  experience.  Like  wine,  the  agency  should  grow 
better  with  age.  It  is  possible  to-day  for  any  merchant 
or  manufacturer  to  secure  professional  advice  on  commer- 
cial problems  from  these  agencies.  For  this  service,  a  com- 
mission of  from  15  to  20  per  cent  on  the  amount  of  ad- 
vertising is  usually  paid. 

The  ideal  advertising  agent  has  been  described  as  fol- 
lows: ''The  good  advertising  agent  is  a  high-grade  busi- 
ness adviser.  He  offers  the  customers  ideas  and  practical 
aid  born  of  experience,  together  with  a  real  concern  as  to 
the  customers'  success.  Advertising  is  to-day  but  one  fea- 
ture of  the  work  of  a  real  agency."  x 

Some  magazines  have  developed  advertising  departments 
which  offer  the  same  services  as  the  independent  agencies. 
A  few  of  these  departments  offer  to  prospective  advertisers 
the  full  benefit  of  their  expert  knowledge.  It  is  the  claim 
of  one  such  department  that  it  knows  more  about  the  busi- 
ness of  many  manufacturers  throughout  the  country  than 
they  know  themselves.     The  object  of  such  study  and  an- 

1  Selling  Forces,  pp.  68-70. 


THE  SALES  ORGANIZATION  419 

alysis  is,  of  course,  to  demonstrate  the  value  of  advertising 
through  their  columns. 

245.  Research  Department. — Another  recent  develop- 
ment in  sales  organization  is  the  research  department.  This 
is,  in  fact,  the  laboratory  of  the  establishment.  Facts  are 
secured  from  various  sources  and  are  analyzed  by  experts 
who  present  the  results  of  their  analyses  to  the  sales  man- 
ager. It  has  been  found  in  many  cases  that  the  research 
department  is  an  effective  means  for  securing  cooperation 
among  all  the  departments  under  the  control  of  the  sales 
manager.  A  more  fundamental  knowledge  of  commercial 
problems  is  demanded  to-day  of  all  progressive  merchants. 
There  is  no  doubt  that  the  research  department  will  have 
a  much  greater  development  in  the  future. 

246.  Sales  Conferences. — An  excellent  means  of  educat- 
ing, coordinating,  and  getting  effective  team-work  from  the 
sales  force  is  the  conference.  This  usually  is  under  the  di- 
rection of  the  sales  manager  and  may  be  called  on  special 
occasions  or  at  specified  times.  The  frequent  practice  is 
to  devote  Saturday  mornings  to  such  a  conference.  The 
experiences  of  the  past  week  are  brought  before  the  mem- 
bers of  the  conference  for  discussion  and  for  general  en- 
lightenment. 

Also,  the  problems  of  each  salesman  can  be  brought  up 
for  discussion  and  solution.  The  best  business  brains  of 
the  establishment  can  thus  be  brought  to  bear  on  the  diffi- 
cult problems  which  face  salesmen  from  time  to  time.  It  is 
especially  important  that  traveling  salesmen  should  meet 
with  the  sales  manager  and  other  co-workers  for  an  open 
discussion  of  the  work  that  they  have  done  and  have  to  do. 

It  is  possible,  therefore,  for  the  sales  manager  to  use  a 
conference  as  a  means  of  instructing  his  salesmen.  Into 
the  meeting  will  come  the  best  men  from  the  force  and  all 
will  get  the  advantage  of  the  expert  knowledge  and  experi- 
ence of  these  leading  salesmen.    A  new  policy  can  be  quickly 


420  MARKETING 

put  into  operation  by  means  of  the  conference.  A  wrong 
tendency  can  also  be  corrected  by  the  same  means.  All 
such  conferences  should  be  held  on  the  company's  time. 

It  is  possible  for  the  inside  force  to  benefit  from  confer- 
ences. Sometimes,  there  is  special  instruction  for  the  en- 
tire sales  force  within  the  establishment.  Generally,  on 
such  occasions,  some  one  gives  a  talk  about  the  merchan- 
dise of  the  special  department,  or  of  the  store  as  a  whole. 
Experience  has  shown  that  these  conferences  have  not 
only  value  for  salesmanship  training,  but  also  a  very  de- 
cided value  for  improving  the  morale  of  the  selling  force. 
Such  general  conferences  can  be  addressed  either  by  spe- 
cial men,  or  by  experts  from  the  outside. 

247.  General  Considerations  of  Salesmanship. — At  the 
basis  of  all  study  of  salesmanship  should  be  the  belief  that 
selling  is  essentially  service.  It  follows,  therefore,  that 
the  task  should  be  done  worthily.  If  selling  is  to  reach  the 
plane  of  dignity  which  it  deserves,  there  is  the  obvious 
need  for  a  higher  degree  of  education  and  training.  In 
many  respects,  the  task  of  selling  needs  to  be  given  dig- 
nity. One  of  the  first  steps  in  this  direction  is  to  secure 
a  fair  reward  for  the  sales  effort. 

A  difficult  task  in  making  salesmanship  better  is  to 
eradicate  all  the  so-called  tricks  of  the  trade.  There  are 
many  devices  known  to  salesmen  for  tricking  the  customer 
into  buying  more  than  he  wants,  what  he  does  not  want, 
or  one  article  when  he  has  asked  for  another.  As  has  been 
pointed  out,  the  customer  has  become  less  and  less  able 
to  judge  goods  for  himself.  He  pays  the  price  asked,  and 
learns  of  the  quality  only  when  he  has  used  the  commodity. 
Obviously,  the  true  standard  of  salesmanship  is  to  have 
honest  goods  honestly  sold. 

A  further  consideration  of  the  selling  problem  is  that 
some  measure  should  be  taken  to  eliminate  the  possibility 
of  the  salesman  making  errors,,  either  in  measuring  or 


THE  SALES  ORGANIZATION  421 

weighing  a  commodity  sold.  It  is  clear  that  if  quantities 
are  weighed  incorrectly,  there  will  be  a  constantly  accumu- 
lating error  in  the  transaction.  If  more  cloth  is  sold  than 
is  paid  for,  even  by  a  few  inches,  the  total  loss  assumes 
substantial  proportions.  Various  clever  machines  have 
been  invented  for  preventing 'errors  of  this  sort.  It  is  not 
a  matter  of  dishonesty,  but  of  human  nature. 

A  problem  for  practical  consideration  is  to  secure  an 
adequate  sales  force  to  take  care  of  the  peak  of  the  load 
during  the  day.  It  may  be  necessary  to  secure  added  sales- 
men for  the  Saturday  trade  or  for  special  holiday  occa- 
sions. There  is  the  usual  surplus  of  salesmen  to  call  in 
for  such  continually  recurring  periods.  A  more  diffi- 
cult problem  however  arises  from  day  to  day.  During  the 
morning  hours,  there  is  a  difference  in  the  number  of 
people  entering  the  store  for  the  purpose  of  making  pur- 
chases. The  very  early  morning  hours  will  be  lax  times. 
The  middle  of  the  morning  will  show  an  increase  in  the 
number  of  purchasers,  with  the  peak  coming  between 
eleven  and  twelve  o  'clock.  There  is  then  a  decided  f alling- 
off  in  number  until  the  middle  of  the  afternoon.  Another 
spurt  of  selling  will  come  just  before  the  closing  hour. 
How  a  merchant  can  take  care  of  these  rush  moments  and 
at  the  same  time  not  burden  himself  with  a  force  that  will 
be  largely  idle  at  other  times  is  a  very  difficult  question. 
Some  merchants  have  met  this  problem  by  keeping  the  sales 
force  busy  in  preparing  for  the  rush  periods.  This  has 
been  done  by  putting  commodities  in  packages  or  arrang- 
ing them  in  such  amounts  as  are  usually  purchased.  In 
this  way,  a  smaller  number  of  salesmen  can  take  care  of  the 
rush  periods. 

A  salesman  is  an  educator  in  wants.  A  part  of  his  task 
is  to  create  new  desires  among  the  customers.  It  should 
be  his  aim  on  all  occasions  to  work  for  an  increase  in  those 
wants  that  will  contribute  to  general  human  welfare.     To 


422  MARKETING 

urge  upon  the  customer  what  is  detrimental  to  his  health 
or  what  will  fix  upon  him  an  unfortunate  habit  is  unethical 
in  salesmanship. 

Selling  is  no  longer  a. matter  of  "putting  something  over 
on  the  customer."  No  business  is  permanently  founded 
that  has  not  established  good  will  among  the  large  group 
of  its  customers.  There  can  be  no  deception  for  a  long 
period  of  time,  because  the  customers  will  discover  the  in- 
ferior qualities  of  the  goods  by  use.  Besides,  if  a  mer- 
chant establishes  a  policy  that  the  customer  is  always  right, 
it  is  the  duty  of  the  salesman  to  see  that  he  is  not  in  any 
way  deceiving  the  customer  as  to  quality  or  quantity  or 
price. 

Selling  should  be  made  an  interesting  and  stimulating 
occupation.  As  many  writers  have  shown,  the  best  method 
of  securing  interest  is  to  give  the  salesmen  a  full  knowl- 
edge of  the  commodities  which  they  sell.  The  commodities 
then  become  more  than  mere  articles,  since  they  take  on 
personality  and  individuality.  If  the  salesman  also  is  in- 
terested in  people,  there  are  constantly  new  individuals 
to  be  observed  and  studied,  and  there  are  countless  interest- 
ing observations  to  make.  It  is  undoubtedly  out  of  an  in- 
terest in  merchandise  and  an  interest  in  people  that  the 
salesman  will  find  his  stimulation. 

There  are  two  kinds  of  salesmen.  One  is  the  general 
salesman  who  sells  many  kinds  of  commodities,  and  the 
other  is  the  special  salesman  who  concentrates  on  a  certain 
line  of  goods.  The  capacity  and  the  training  of  these  two 
types  of  salesmen  will  naturally  be  different.  The  special 
salesman  will  probably  be  an  expert.  He  will  need  peculiar 
training  in  order  to  secure  the  expert  knowledge.  The  gen- 
eral salesman  will  correspond  to  the  practitioner  in  medi- 
cine who  takes  all  kinds  of  cases  that  come  to  him.  The 
special  salesman  will  correspond  to  the  specialist  in  medi- 
cine who  has  concentrated  his  efforts  on  mastering  a  cer- 


THE  SALES  ORGANIZATION  423 

tain  branch  of  the  general  field.  Undoubtedly  the  special 
salesman  will  find  a  greater  reward  and  greater  interest 
and  a  greater  stimulation  in  his  work. 

The  salesman  is  a  personal  representative  of  the  mer- 
cantile establishment.  His  actions  and  his  personality 
will  represent  to  a  large  number  of  people  the  policy  and 
the  personality  of  the  house.  There  is,  therefore,  a  re- 
sponsibility on  every  salesman  to  represent  worthily  the 
merchant  who  has  secured  his  services.  In  this  way  he  will 
become  a  part  of  the  sales  organization  that  works  harmoni- 
ously for  their  common  success. 

Suggestions  for  Study 

The  student  should  study  the  sales  organization  in  some 
individual  establishment  which  handles  the  commodity  that, 
he  is  investigating.  The  following  subjects  will  serve  for 
classroom  study: 

Selecting  the  Sales  Force 

1.  The  legal  problem. 

2.  The  human  element  in  business  relationship. 

3.  Standardizing  the  salesman. 

4.  Analyzing  the  selling  forces. 

5.  The  psychological  factors. 

Training  the  Sales  Force 

1.  Vocational  education. 

2.  Professional  education. 

3.  School  system  of  education. 

4.  Training  and  experience. 

5.  Organized  training  by  individual  businesses. 

6.  Theoretical   training   vs.   practical   experience. 

Organizing  the  Sales  Force 

1.  Lines  of  authority  in  sales  force. 

2.  Functional  relationships. 


424  MAKKETING 

3.  The  consumer  and  sales  organization. 

4.  Individuality  in  a  sales  organization. 

5.  The  external  and  the  internal  problem  of  organizing  sales- 
men. 

6.  Temperament  in  sales  organization. 

7.  Specialization  in  sales  organization. 

Readings  : 
Library  of  Business   Practice:    vol.  iv,   Part  II,   Chap.   IX, 

"Hiring  and  Handling  Salesmen";  vol.  iii,  Part  III,  Chap. 

XIII,  "Where  to  Find  the  Best  Salesmen,"  Chap.  XVIII, 

"Building  Up  a  Retail  Sales  Force";  Chap.  XVI,  and  XVII; 

vol,  iv,  Part  II,  "Organizing  and  Managing  the  Sales  Force"; 

Chap.  X,  "Team  Work  Among  Salesmen";  Part  III,  Chap. 

XIX,  "Using  Cooperation  to  Build  Salespeople." 
Brisco,  Fundamentals  of  Salesmanship,  Chap.  XXII,  "Hiring"; 

Chap.  XXIV,  "Training";  Chap.  XIX,  "The  Manager  and 

the  Sales  Force." 
Maxwell,  Salesmanship,  Chap.  VIII,  "Management  of  Travel- 
ing Salesmen." 
Weld,  Practical  Salesmanship,  pp.  92-160. 
Jones,  Salesmanship  and  Sales  Management,  Chap.  IV. 
Shively,  Salesmanship,  vol.  ii,  Chap.  III. 
Printer's  Ink,  May  11,  1916,  p.  85;  April  20,  1916,  p.  38; 

August  5,  1915,  p.  33;  February  4,  1915,  p.  104;  February 

24,  1916,  p.  37;  January  27,  1916,  p.  10;  November  7,  1915, 

p.  102. 
Farrington,  Store  Management   Complete,   Chap.  VI,  "Clerk 

Management." 
Sheldon,  The  Art  of  Selling,  pp.  11-36. 
Hirschler,  The  Art  of  Selling  (Retail),  Part  L 
Hall,  Short  Talks  on  Retail  Selling,  pp.  8-19. 
Hoover,  Practical  Salesmanship,  pp.  99-165. 
Leigh,  The  Human  Side  of  Retail  Selling. 
Moody,  Men  Who  Sell  Things,  Chap.  XII,  "Right  Kind  of 

Salesmen." 
Alexander  Hamilton  Institute,  Marketing  Methods  and  Sales- 


THE  SALES  ORGANIZATION  425 

manship,  Part  III,  Chap.  II,  "Selecting  Men";  Chap.  Ill, 
"Training  Salesmen." 

Nystrom,  Retail  Selling,  Chap  II. 

,  Economics  of  Retailing,  Chap.  VI. 

Blackford,  The  Job,  the  Man,  and  the  Boss,  Chaps.  VI,  VII, 
VIII,  IX. 

Madden,  Selling  Things,  Chap.  II,  "Training  the  Salesmen." 

Modern  Business,  vol.  iii,  Chap  IX,  "Methods  of  Training 
Salesmen." 

Eisk,  Retail  Selling,  Chap.  IV,  "Organization  of  Sales  Force"; 
Chap.  XI,  "Retail  Selling,  Training  for  Retail  Salesman- 
ship." 

Hoyt,  Scientific  Sales  Management,  Chap.  I,  "Two  Kinds  of 
Salesmen";  Chap.  Ill,  "What  Is  Scientific  Sales  Manage- 
ment?"; Chap.  X,  "Councils,  Meetings,  and  Conventions"; 
Chap.  XVI,  "Hiring  Salesmen." 

Frederick,  Modem  Salesmanagement. 


CHAPTER  XX 

ECONOMICS   OP   ADVERTISING 

248.  The  Study  of  Advertising  Media. — The  business 
dictum  has  gone  abroad  that  the  merchant  must  advertise 
to  live,  and  that  the  advertising  must  be  continuous  and 
comprehensive.  Whether  this  dictum  is  rooted  in  expe- 
rience or  whether  it  is  nourished  and  tended  by  those  who 
have  advertising  space  for  sale  may  still  be  an  open  ques- 
tion. But  that  the  grand  total  sum  of  money  spent  for 
advertising  in  this  country  is  stupendous  is  not  to  be 
doubted.  It  has  been  estimated  that  it  reaches  a  billion 
dollars  annually.  Experts  have  arisen  to  act  as  guides  in 
this  vast  expenditure.  All  sorts  of  media  have  been  de- 
vised and  used.  This  new  business  force  has  entered  as 
a  disturbing  element  into  business  relations. 

Advertising  has  seized  upon  newspapers  and  magazines 
whose  primary  purpose  was  literary,  and  by  extending  its 
financial  power  has  threatened  to  dominate  the  policies  of 
those  media.  The  financial  powers  behind  the  advertis- 
ing columns  have  been  accused  of  coloring  news,  and  of 
controlling  the  political,  economic,  and  social  policies 
advocated.  This  situation  has  created  some  big  social 
problems. 

Many  businesses  have  developed  their  own  media  of 
advertising  in  the  form  of  house  organs.  This  is  a  highly 
specialized  medium  and  is  probably  limited  in  its  influence 
and  possible  development.  Others  have  sought  to  utilize 
their  manufacturing  and  mercantile  establishments  as  aids 

426 


ECONOMICS  OF  ADVERTISING  427 

in  advertising.  Hence,  unusually  attractive  buildings  are 
erected,  and  windows  are  carefully  trimmed  to  afford  the 
greatest  lure  for  prospective  purchasers. 

The  media  used  in  spending  the  billion  dollars  every 
year  are  too  numerous  to  count.  Advertisements  shout  at 
us  from  field  and  wood;  streets  are  lined  with  them,  the 
landscape  is  dotted  with  them.  There  are  all  sizes  and 
shapes  and  colors;  light,  color,  electricity,  and  mechanical 
ingenuity  are  being  pressed  into  the  service  of  advertising. 
And  the  end  is  not  yet. 

What  one  or  what  combination  of  these  multitudinous 
media  is  best  for  a  given  commodity?  That  is  a  big  prob- 
lem of  sales  management.  Economists  say  that  the  success 
of  advertising  depends  directly  upon  the  amount  of  money 
available  for  this  use;  the  business  with  practically  un- 
limited funds  will  succeed.  There  are,  of  course,  modify- 
ing factors.  The  size  of  the  market  to  be  reached  and 
the  character  of  the  market  are  two  of  these  factors  to  be 
considered.  There  must  be  many  more,  such  as  the  nature 
of  returns  desired,  business  habits,  cost,  relation  to  existing 
distributive  organization,  and  others. 

No  advertising  medium  can  be  adjudged  justly  until 
some  adequate  measurement  of  returns  may  be  had.  This 
measurement  is  in  itself  an  exceedingly  difficult  matter, 
but  it  underlies  the  whole  process  of  determining  whether 
or  not  advertising  really  pays,  directly  or  indirectly,  imme- 
diately or  in  the  long  run. 

249.  What  Is  Advertising? — Advertising  is  so  varied  in 
character  and  shades  off  so  imperceptibly  into  other 
methods  that  no  dogmatic,  definite  explanation  of  its  scope 
will  suffice.  It  has  been  called  "salesmanship  on  paper," 
performing  the  same  function  as  any  member  of  the  sales 
force.  There  is,  too,  a  "preparing  the  way"  theory  c-f 
advertising,  which  points  out  the  fact  that  advertisements 
are  suggestive,  educational,  but  they  do  not  close  a  sale. 


428  MARKETING 

The  Supreme  Court  of  the  United  States  has  essayed  a 
definition  as  follows:  "Advertising  is  mere  identification 
and  description,  apprising  of  quality  and  place.  It  has 
no  other  object  than  to  draw  attention  to  the  article  to 
be  sold."1 

A  criticism  of  this  narrow  definition  of  advertising  has 
been  made: 

There  is  no  place  for  the  educational  advertising  campaign, 
the  development  of  new  wants;  there  is  no  place  for  an  adver- 
tisement whose  purpose  it  is  to  sell  a  certain  make  of  goods 
where  there  are  a  half  dozen  of  equal  quality  at  the  same  place. 
.  .  .  Has  the  learned  judge  never  delved  into  the  new  business 
of  advertising?  Does  he  not  know  of  the  eager  study  of  methods 
of  appeal,  of  the  principles  of  psychology,  of  art,  of  color  effects, 
of  design,  of  the  power  of  words  ?  Has  he  never  seen  any  appeal 
to  cupidity,  any  "insidious  potentialities,"  any  "lure  to  im- 
providence," any  seductive  power  on  wall  and  tree,  in  street  car, 
and  on  magazine  and  newspaper  page?  Is  there  no  "insidious 
seduction,"  no  lure  in  legalized  "puffing"  of  one's  goods?2 

It  may  thus  be  seen  that  advertising  has  greatly 
broadened  in  recent  years.  Undoubtedly,  there  is  an  almost 
infinite  number  of  devices  to  which  tradesmen,  wholesale 
dealers,  and  manufacturers  resort  to  promote  the  sale  of 
their  goods.  All  of  them  are  advertising.  And  so  is  the 
"puffing"  of  a  candidate  for  office,  the  appeal  for  funds, 
and  almost  any  form  of  propaganda.  Advertising  in  trade 
is  any  method,  other  than  through  personal  agents  such  as 
salesmen,  for  increasing  the  sales  of  one's  goods.  "When 
there  are  similar  methods  used  outside  of  trade,  they 
may  also  be  called  advertising  in  a  very  broad  sense. 

On  this  basis,  advertising  is  of  two  general  kinds;  one 
is  direct  and  the  other  indirect.    Announcing  the  character 

*Kast  v.  Van  Deman,  240  U.  S.  360. 

'Duncan,  Journal  of  Political  Economy,  vol  xxiv,  p.  947. 


ECONOMICS  OF  ADVERTISING  429 

of  one's  goods  through  the  columns  of  a  newspaper  or  a 
magazine,  by  bill  boards,  by  street-ear  cards  and  electric 
signs,  is  an  indirect  method.  The  use  of  a  sales  letter  is  a 
direct  method. 

In  a  very  vital  sense,  advertising  serves  as  a  dynamic 
organizing  force  in  merchandising  manufactured  goods, 
just  as  trade  information  serves  as  a  dynamic  force  in 
dealing  with  raw  materials  and  foodstuffs.  The  subject 
matter  of  advertising  is  trade  information.  It  results  from 
an  analysis  of  a  commodity  in  relation  to  human  wants, 
actual  and  potential. 

250.  Character  of  the  Commodity  and  Advertising. — In 
studying  advertising  as  an  economic  force,  a  practical 
query  is  whether  or  not  every  commodity  is  susceptible  to 
being  advertised.  The  great  bulk  of  raw  materials  and 
foodstuffs  passing  through  the  market  are  not  advertised. 
Many  manufactured  goods,  also,  are  handled  in  the  market 
without  advertising.  Is  it  possible  to  apply  this  force  to 
all  kinds  of  commodities? 

As  has  been  shown,  advertising  is  a  species  of  selling. 
It  is,  in  fact,  selling  goods,  largely  at  long  range,  by  de- 
scription and  by  sample.  Clearly,  therefore,  an  individual 
commodity  may  be  described  and  sold  by  this  method.  A 
sample,  however,  requires  that  all  individual  articles  must 
have  the  same  characteristics  as  the  sample.  In  other 
words,  selling  by  samples  requires  standardization.  Gen- 
erally speaking,  effective  advertising  can  be  applied  only 
to  those  commodities  that  are  standardized. 

Standardization  of  commodities,  however,  may  apply 
either  to  physical  characteristics  or  to  quality.  A  certain 
manufacturer  or  jobber  or  retailer  may  have  established 
for  himself  a  quality  reputation.  Consumers,  through 
experience,  have  grown  to  accept  the  goods  which  these 
business  men  handle  as  of  certain  grade  or  quality.  On  the 
basis  of  this  kind  of  standardization,  even  style  goods, 


430  MARKETING 

which  are  so  classed  because  each,  individually,  has  distinct 
characteristics,  may  be  advertised.  It  is  possible,  also,  on 
this  same  basis  to  advertise  goods  that  are  made  on  order. 

Generally,  standard  goods  are  also  goods  that  are  trade- 
marked,  or  given  trade  names  for  the  purpose  of  identifica- 
tion. The  most  effective  advertising  is,  therefore,  to  be 
found  in  the  cases  of  goods  that  have  been  identified.  There 
is  probably  a  relationship  of  cause  and  effect  that  works 
reciprocally  at  this  point.  That  is,  the  tendency  to 
standardize  goods  results  in  identification  of  those  goods. 
On  the  other  hand,  the  endeavor  to  identify  goods  leads 
almost  inevitably  to  some  form  of  standardization. 

It  is  interesting  to  note  in  this  connection  that  the 
methods  of  merchandising  manufactured  goods  have  been 
applied  with  success  to  the  marketing  of  citrus  fruit,  raisins, 
lumber,  and  other  foodstuffs  and  raw  materials.  In  these 
cases,  however,  there  has  been  careful  attention  given  to 
grading,  which  is  an  obvious  attempt  to  standardize  these 
goods.  It  is  clear,  therefore,  that  the  group  of  advertisable 
goods  is  being  rapidly  enlarged. 

It  is  important  to  consider  further,  in  respect  to  advertis- 
ing as  applied  to  various  kinds  of  commodities,  whether 
or  not  these  goods  are  old,  established  goods  or  new  lines. 
The  kind  of  appeal  and  the  methods  used  will  vary  in 
these  different  cases.  Under  the  business  dictum  that  a 
merchant  or  manufacturer  must  advertise  or  perish,  it  is 
clear  that  even  those  goods  which  have  an  established  repu- 
tation in  the  market  must  still  be  advertised  in  order  that 
they  may  hold  their  place....  On  the  other  hand,  the  selling 
of  new  goods  and  new  applications  to  human  wants  of 
established  goods  can  be  secured  by  educational  advertis- 
ing". The  preliminary  step  in  the  solution  of  the  advertising 
problem  is  a  thorough  analysis^of  the  commodity. 

251.  Character  of  Market  and  Advertising. — It  is  like- 
wise necessary  to  analyze  market  demand  before  determin- 


ECONOMICS  OF  ADVERTISING  431 

ing  upon  an  advertising  plan.  The  interests  and  business 
habits  of  the  prospective  consumers,  their  illiteracy,  their 
prejudices,  a  knowledge  of  what  they  read,  of  where  they 
go,  are  all  parts  of  the  problem.  No  appeal  can  be  effec- 
tive unless  it  is  adjusted  to  all  these  characteristics  of  the 
group  of  people  to  whom  the  appeal  is  made.  To  advertise 
without  comprehensive  and  thorough  market  analysis  is  as 
uncertain  in  results  as  the  proverbial  casting  of  bread  upon 
the  waters. 

The  two  cardinal  principles  of  advertising  are  that  it 
must  be  persistent,  and  it  must  be  intelligent.  The  goods 
are  to  be  kept  always  before  the  eye  and  in  the  mind. 
Especially  is  it  necessary  to  suggest  the  goods  at  those 
times  when  they  may  be  particularly  desired.  In  rural 
churches  where  palm-leaf  fans  are  distributed  by  the  enter- 
prising advertiser,  the  advertisements  on  them  will  largely 
apply  to  those  commodities  which  are  most  to  be  desired 
by  people  in  hot  or  stuffy  rooms.  Cooling  drinks  are 
emblazoned  on  all  the  fences  at  baseball  grounds.  Adver- 
tising managers  have  been  energetic  and  aggressive  in 
following  out  this  general  principle. 

Many  advertisers,  however,  have  made  the  grave  mistake 
of  applying  too  generally  the  principle  which  they  have 
found  effective  in  certain  regions.  For  example,  American 
manufacturers  have  attempted  to  establish  a  market  for 
their  commodities  in  South  American  countries  where  the 
illiteracy  of  the  people  approaches  95  per  cent  by  using 
the  same  methods  which  they  have  used  in  the  United 
States.  But  the  most  illiterate  people  can  be  impressed 
by  pictures,  and  by  appeals  to  the  ear  and  eye.  It  is 
for  this  reason  that  a  manufacturer  of  sewing-machines 
has  successfully  identified  his  product  in  various  foreign 
markets  by  a  distinct  sign.  Those  who  see  this  sign  are 
not  supposed  to  read  what  is  there  printed,  but  to  asso- 
ciate it  with  the  article  itself.     Many  trade-marks  in  the 


432  MARKETING 

Chinese  market  are  not  understood  by  the  buyers,  but  they 
nevertheless  stand  for  certain  qualities,  and  thus  prove 
effective  sales  media. 

Advertising  should  also  be  made  to  suit  the  taste  of  the 
prospective  consumer.  Some  people  are  not  only  not  at- 
tracted by  flaring  colors  and  crude  pictures,  but  are  even 
repelled  by  them.  There  are  many  people,  too,  who  feel 
that  certain  attractive  bits  of  natural  scenery  or  certain 
places  of  historic  interest  should  not  be  used  by  any  mer- 
chant to  advertise  his  goods.  In  other  words,  the  finesse  of 
personal  salesmanship  should  be  used  in  developing  meth- 
ods of  advertising.  The  advertising  manager  has  as  great 
a  need  of  studying  the  consumer  as  has  the  sales  manager. 

252.  Size  of  Market  and  Advertising. — Just  as  the  mar- 
ket area  for  any  given  commodity  may  be  either  local, 
national,  or  international,  so  likewise  the  advertising  cam- 
paign to  sell  these  commodities  may  be  local,  national,  or 
international.  The  manufacturer  of  products  for  general 
consumption  is  particularly  interested  in  national  or  inter- 
national markets.  The  jobber,  also,  desires  to  extend  the 
boundaries  of  the  market  for  the  commodities  which  he 
handles  and  develops  a  national  or  international  advertis- 
ing campaign.  In  general,  the  retailer  is  a  local  advertiser 
for  the  simple  reason  that  his  market  is  a  local  one. 

It  is  obvious  therefore  that  the  character  of  advertising 
will  be  modified  to  a  considerable  extent  by  the  size  of  the 
market.  The  medium  which  is  selected  will  be  determined 
finally  by  this  factor.  A  magazine  of  national  circulation 
will  not  be  used  by  the  local  dealer.  The  national  adver- 
tiser cannot  consider  as  carefully  the  local  conditions  of 
any  market  center.  Large-scale  production  in  the  United 
States  has  tended  to  develop  rapidly  national  advertising 
campaigns. 

253.  Selection  of  Media. — Apart  from  the  subject  matter 
of  an  advertisement,  there  is  the  selection  of  the  medium 


ECONOMICS  OF  ADVERTISING  433 

which  is  to  carry  it.  The  previous  discussion  has  developed 
the  fact  that  the  "copy"  of  an  advertisement  will  result 
only  from  the  study  of  the  commodity  and  the  market  for 
it.  In  so  far  as  advertising  is  a  sales  method,  it  is  necessary 
to  study  the  selling  points  of  a  product,  that  is,  the  utilities 
of  the  given  commodity.  The  results  of  such  study  can 
direct  the  selection  of  the  market  by  class,  by  geographical 
location,  by  business  habits,  etc.  There  is  a  great  variety 
of  media  which  the  advertiser  may  use.  A  number  of  the 
chief  ones  will  be  discussed  in  this  section.  They  may 
be  divided  into  the  following  classes:  newspapers,  maga- 
zines, house  organs,  business  letters,  outside  advertising, 
street-car  advertising,  and  window-displays.  Some  con- 
sideration also  is  given  to  the  means  peculiar  to  mail- 
order houses  that  sell  through  the  catalog. 

254.  Newspapers. — The  newspaper  is  to  be  distinguished 
from  the  magazine  chiefly  on  the  basis  of  the  time  of  its 
appearance.  It  is  published  more  frequently  than  any 
other  kind  of  periodical  which  its  readers  receive,  and  it 
carries  as  its  mainstay  a  great  volume  of  local  and 
ephemeral  news  or  gossip.  Classified  on  the  basis  of  the 
time  of  its  appearance  and  the  character  of  material  which 
it  carries,  the  newspaper  may  be  termed  a  daily,  weekly, 
semi-weekly,  or  Sunday  publication.  There  were  in  the 
United  States  in  1916  some  2,500  newspapers  of  which  prac- 
tically 600  had  Sunday  editions.  There  were  about  14,000 
weekly  and  semi- weekly  newspapers  in  the  United  States. 
In  thirty-two  of  the  fifty  cities  in  the  country  with  a 
population  of  100,000  or  over,  there  were  119  daily  news- 
papers with  an  average  circulation  in  excess  of  50,000. 
The  total  ci/culation  of  these  119  dailies  was  15,649,634. 
The  total  circulation  in  1914  for  the  daily  newspapers  in 
the  United  States  was  about  30,000,000  copies.  More  than 
1,000  of  these  daily  newspapers  have  weekly  or  semi-weekly 
editions.     *fhe  Sunday  newspapers  of  the  United  States 


434  MARKETING 

have  about  17,000,000  circulation  and  the  weeklies  and 
semi-weeklies  about  24,000,000. 

An  estimate  was  made  in  1911  as  to  the  amount  of  adver- 
tising carried  by  the  newspapers  of  the  country.  This  esti- 
mate put  the  amount  of  money  invested  in  retail  and 
general  advertising  in  the  columns  of  the  newspaper  at 
$250,000,000.3  Undoubtedly,  with  increased  circulation 
and  increased  cost  of  publishing,  the  amount  to-day  is  con- 
siderably beyond  this. 

It  has  been  said  that  these  daily,  Sunday,  and  weekly 
newspapers  furnish  the  cheapest  and  most  serviceable 
means  of  disseminating  information,  general  and  local,  to 
the  105,000,000  people  in  this  country.  Practically  every 
community  and  every  town  of  any  size  in  the  United  States 
has  at  least  one  publication  of  this  kind  devoted  especially 
to  local  affairs.  It  becomes  necessary,  therefore,  to  study 
carefully  this  medium  for  carrying  advertising  matter. 

The  analysis  necessary  for  intelligent  use  of  newspapers 
as  advertising  media  will  include  the  following  points: 
(1)  the  reputation  of  the  paper;  (2)  the  general  make-up 
and  tone  of  the  paper;  (3)  the  class  or  quality  of  sub- 
scribers; (4)  the  character  of  the  paper,  namely,  whether 
religious,  political,  financial,  etc.;  (5)  essential  facts  of 
circulation;  (6)  the  number  of  editions  and  the  time  of 
issue;  (7)  the  kind  of  advertisements  which  it  carries.  It 
is  also  to  be  considered  that  the  newspaper  is  a  tremendous 
concentrating  force,  more  rapid,  more  thorough,  and  more 
effective  than  almost  any  other  means  of  local  stimulation. 

The  case  for  using  newspapers  as  a  medium  of  advertis- 
ing may  be  stated  under*  the  following  heads:  (1)  it 
reaches  all  classes  of  readers  intensively;  (2)  it  promotes 
local  emphasis;  (3)  if  attention  is  gained,  the  advertise- 
ment will  reach  a  larger  percentage  of  a  given  group  in  a 
given  time  than  any  other  medium;  (4)  it  is  the  medium 

'Printer's  Ink,  May  4,  1911,  p.  78. 


ECONOMICS  OF  ADVERTISING  435 

to  use  for  quick  returns;  (5)  it  can  take  advantage  of 
local  incidents.  It  has  been  said  that  "as  an  advertis- 
ing medium,  the  newspaper  displays  its  greatest  strength 
with  commodities  which  are  of  general  interest  to  the 
people,  and  in  more  or  less  general  use." 

Against  the  use  of  newspaper  columns  for  advertising, 
it  has  been  said  that  there  is  a  general  lack  of  definite 
business  policy  behind  them.  There  is  also  an  absence 
of  any  concerted  attempt  to  supervise  the  character  of 
advertisements  that  are  accepted.  It  is  further  held  that 
"while  there  are  many  important  exceptions,  the  news- 
paper is  the  last  stand  of  the  stock  swindler,  the  real  estate 
swindler,  the  patent  medicine  and  cure-all  fake,  and  the 
rest  of  the  brotherhood  who  have  so  long  taken  advantage 
of  the  force  of  advertising  to  separate  the  gullible  portion 
of  the  public  from  its  money  without  returning  value  in 
proportion."  4 

255.  Magazines. — There  are  various  types  of  magazines 
and  other  periodicals  which  may  be  classed  with  them  in 
the  United  States.  The  figures  for  January  1,  1917,  are 
as  follows: 

Class  and  trade  publications   4,200 

Religious  publications    850 

Farm  journals  500 

Secret   society   publications    250 

Publications  of  general  circulation: 

Magazines 117 

Women's  publications 39 

Mail-order  publications   29 

Total 5,985 

This  list  obviously  does  not  include  the  3,000  or  more 
trade  papers  that  are  issued  by  trade  associations  in  this 

*  Cf.  Tipper,  Hollingworth,  etc.,  Principles  and  Practices  of  Ad- 
vertising. 


436  MARKETING 

country.  Of  the  publications  of  general  circulation,  106 
have  a  combined  circulation  of  more  than  23,500,000.  The 
39  women's  publications  have  a  circulation  around  24,500,- 
000.  The  circulation  of  the  29  mail-order  publications  is 
estimated  at  about  16,000,000.  Thirty-eight  of  the  850 
religious  papers  have  a  circulation  of  more  than  100,000 
each.  There  are  49  farm  journals  with  a  circulation  of 
more  than  100,000.  There  are,  of  course,  the  popular 
weekly  magazines  that  have  passed  far  beyond  the  million 
mark  in  circulation.5  These,  too,  are  clearly  a  force  to  be 
reckoned  with  as  advertising  media. 

Magazines  may  be  classified  on  the  basis  of  the  interval 
between  issues  into  weekly,  bi-monthly,  monthly,  and 
quarterly  magazines.  On  the  basis  of  the  class  of  people 
to  whom  they  appeal,  magazines  may  be  classed  as  general, 
trade  journals,  women's  publications,  etc.  Each  of  these 
classes  will  be  suited  to  particular  kinds  of  advertising. 

The  arguments  for  the  use  of  magazines  as  media  of 
advertisements  are  numerous:  (1)  the  magazine  reaches 
particular  groups  of  people  in  all  sections  of  the  country, 
and  has  therefore  the  merit  of  even  distribution;  (2)  peo- 
ple read  magazines  more  leisurely  than  newspapers  and  as 
a  result  more  attention  is  likely  to  be  paid  to  the  adver- 
tisement; (3)  the  magazine  goes  into  the  home  and  is 
placed  on  the  library  table  where  it  remains  to  be  read 
from  time  to  time  over  a  long  period;  (4)  a  single  copy 
of  the  magazine  is  frequently  read  by  several  persons; 
(5)  the  magazine  offers  better  facilities  for  high-grade 
illustrations  and  for  the  use  of  colors;  (6)  a  yearly  sub- 
scription guarantees  the  effectiveness  of  repetition  in  adver- 
tising the  product. 

In  analyzing  the  magazine  for  its  advertising  possibilities, 
there  are  several  important  questions  to  be  asked.     It  is 

5 Senate  Document  No.  79,  "Book  Paper  Industry,"  p.  21,  65th 
Congress,  1st  Session. 


ECONOMICS  OF  ADVERTISING  437 

essential  to  know  the  total  amount  of  advertising  which 
the  particular  magazine  carries.  One  should  inquire  also 
into  the  recognized  standing  of  the  magazine.  There  are 
such  questions  as  price,  size,  shape,  color  of  paper,  and 
the  editorial  policy  of  the  magazine.  Is  it  distributed  by 
subscription  or  through  news-stands?  Is  the  circulation 
of  the  paper  obtained  by  club  methods,  by  free  distribution, 
or  by  straight  subscription?  It  is,  of  course,  necessary 
to  know  the  total  circulation  of  the  magazine,  as  well  as 
its  regional  circulation. 

From  the  point  of  view  of  those  who  will  likely  read  the 
magazine,  one  should  ask  about  the  purchasing  power  of 
the  readers,  their  occupations,  financial  standing,  culture, 
etc.  The  analysis  of  circulation  should  be  made  to  include 
facts  relating  to  states,  to  buying  centers,  to  groups  of 
cities,  and  to  occupations.  There  is  also  the  technical 
information  as  to  the  kind  of  plates  that  may  be  used,  the 
closing  dates,  the  rate  cards,  the  various  rules  and  regula- 
tions covering  advertising  matter. 

256.  House  Organs. — The  house  organ  is  essentially  a 
highly  specialized  medium.  It  is  primarily  intended  to 
promote  good  will  among  the  employees  in  a  given  estab- 
lishment. Sometimes,  however,  house  organs  are  of  broader 
appeal  and  carry  information  that  is  of  more  general  in- 
terest. There  are  certain  house  organs  which  take  advertis- 
ing matter  from  outside  the  plant.  Others  have  a  policy 
of  excluding  anything  beyond  the  immediate  interest  of 
the  establishment.  As  an  advertising  medium,  therefore, 
the  house  organ  is  strictly  limited  in  possibilities.  It  is 
clear  that  the  columns  of  this  medium  cannot  be  open  to 
any  competitor,  or  any  one  selling  goods  that  would  in- 
terfere with  the  market  of  the  firm.  Cooperation,  however, 
with  allied  industries  is  possible.  The  manufacturer  of 
automobile  accessories  could  readily  admit  into  the  columns 
of  his  house  organ  advertisements  of   those   automobiles 


438  MARKETING 

for  which  his  products  are  fitted.  The  same  is  true  in 
all  allied  industries.  As  an  advertising  medium,  neverthe- 
less, the  house  organ  is  of  very  minor  importance. 

257.  Business  Letters. — Most  sales  letters  can  be  classed 
as  direct  advertising  media.  They  prepare  the  way  largely 
for  the  visit  of  the  salesman  and  have  to  do  with  closing 
the  sales  contract.  The  letter  which  is  sent  out  by  many 
establishments  carries  the  same  kind  of  material  as  the 
advertising  matter  in  other  media. 

The  business  letter  can  be  made  an  effective  means  of 
bringing  goods  before  the  mind  of  the  prospective  customer. 
Its  relation  to  general  advertising  has  been  likened  to  the 
general  estimate  as  compared  with  a  precise  figure.  The 
general  advertisement  is  spread  broadcast  with  no  definite 
person  in  mind.  The  sales  letter  is  sent  direct  to  an 
individual.  The  success  of  the  sales  letter  may,  therefore, 
be  more  easily  determined  and  its  preparation  can  be 
guided  by  a  more  specific  consideration. 

The  main  characteristics  of  a  successful  business  letter 
may  be  stated  as  follows :  ( 1 )  the  business  letter  must  be,  as 
a  prime  requisite,  interesting  to  the  reader;  (2)  the  busi- 
ness letter  should  be  brief  and  to  the  point ;  (3)  the  business 
letter  should  be  courteous  and  respectful  and  simple  and 
direct;  (4)  it  should  be  tested  by  its  effect  upon  one's 
self;  (5)  it  is  necessary  for  the  writer  of  a  successful  sales 
letter  to  understand  clearly  the  situation  which  is  to  be 
stated  by  the  letter;  (6)  the  good  sales  letter  is  char- 
acterized by  absolute  sincerity;  (7)  the  form  of  the  letter, 
the  paper,  the  heading,  the  type,  and  all  the  physical  char- 
acteristics must  be  pleasing  and  effective.  In  general,  the 
sales  letter  should  be  given  the  same  careful  consideration 
that  is  given  to  any  other  phase  of  the  sales  campaign.  No 
carelessness,  either  in  expression  or  in  the  making  of  the 
letter,  should  be  permitted.  Good  sales  letters  are  a  work 
of  art. 


ECONOMICS  OF  ADVERTISING  439 

258.  Outdoor  Advertising. — There  has  been  a  rapid  de- 
velopment of  facilities  for  outdoor  advertising.  These  will 
include  electric  signs,  billboards,  and  every  other  device 
for  bringing  the  commodity  to  the  attention  of  the  pass- 
ers-by. 

The  arguments  for  using  outside  media  for  advertising 
are  chiefly  as  follows:  (1)  outdoor  advertising  is  valuable 
because  of  its  flexibility.  It  permits  concentration  at  any 
geographical  point,  and  it  may  be  confined  to  a  state,  to 
a  city,  or  to  a  single  block;  (2)  outdoor  advertising  claims 
that  there  is  no  waste  in  its  circulation.  As  a  matter  of 
fact,  it  does  not  circulate — it  stands  in  the  way  of  the 
passing  throng;  (3)  the  advertisement  on  the  billboard  or 
sign  is  "alive"  all  the  time;  (4)  there  can  be  carefully 
planned  cooperation  between  the  selling  force  and  the 
simultaneous  appearance  of  posters;  (5)  there  are  many 
realistic  possibilities  in  posters,  as  human  figures,  or  inter- 
esting scenes,  or  attractive  reproductions  of  the  commodity 
itself  may  be  used;  (6)  there  are  also  many  possibilities 
in  the  effective  use  of  colors;  (7)  the  advertisement  placed 
in  outdoor  advertising  is  carefully  censored  by  billboard 
companies;  (8)  this  means  of  advertising  is  applicable  to 
both  local  and  national  advertising;  (9)  outdoor  advertis- 
ing can  be  used  to  reenforce  other  forms  of  advertising; 
(10)  it  can  be  so  placed  that  its  message  is  concentrated 
at  one  strategic  point. 

259.  Street-Car  Advertising. — With  the  development  of 
street  railways,  there  has  been  at  the  same  time  a  constantly 
growing  use  of  street-car  cards  for  carrying  advertising 
matter.  It  is  argued  that  the  space  above  the  windows  of 
the  cars  would  otherwise  be  wasted,  and  that  the  passengers 
are  able  to  divert  themselves  by  reading  what  is  written 
on  these  cards. 

Street-car  advertising  has  really  no  circulation.  What 
corresponds  to  the  circulation  of  a  newspaper  or  magazine 


440  MARKETING 

is  the  number  of  people  who  read  the  cards  in  the  cars. 
It  has  been  estimated  that  the  number  of  passengers  daily 
for  each  car  in  the  United  States  averages  between  600 
and  800,  exclusive  of  free  transfers.  The  number  of  cars 
in  the  United  States  is  approximately  50,000.  The  total 
number  of  passengers  daily,  therefore,  ranges  between 
30,000,000  and  40,000,000.  Annually,  the  number  would 
be  between  ten  billion  and  twelve  billion.  It  is  also  de- 
clared that  the  number  of  daily  passengers  on  street  cars 
will  closely  approximate  the  population  where  these  cars 
are  run.  In  Philadelphia,  where  the  population  is 
1,800,000,  the  average  number  of  passengers  daily  has  been 
estimated  at  1,600,000.  In  Chicago,  the  annual  daily  aver- 
age for  eight  years  on  the  elevated  roads  alone  was 
1,200,000.  Futhermore,  it  is  argued  that  more  than  one- 
half  of  the  population  of  the  United  States  lives  in  the 
cities,  and  therefore  street-car  advertising  covers  more 
than  one-half  the  total  population.  This  calculation,  how- 
ever, does  not  take  into  account  the  fact  that  the  same 
people  often  ride  several  times  in  one  day. 

The  case  for  street-car  advertising  will  include  these 
points:  (1)  the  street-car  card  reaches  a  great  number  of 
people  intensively  in  a  given  area;  (2)  street-car  advertis- 
ing can  be  used  to  advantage,  either  by  national  or  by 
strictly  local  advertisers;  (3)  the  passenger  can  read  the 
cards  at  leisure,  is  in  a  receptive  mood,  and  the  impression 
is  easily  and  definitely  made;  (4)  the  so-called  "time 
exposure"  of  the  street-car  card,  that  is,  the  period  of  time 
during  which  the  passenger  faces  the  card,  is  on  an  aver- 
age between  fifteen  and  thirty  minutes;  (5)  there  is  a 
strong  element  of  repetition  in  street-car  advertising,  cards 
are  seen  by  the  same  people  each  day,  sometimes  twice, 
sometimes  three  or  four  times,  for  the  majority  of  pas- 
sengers repeat  their  rides;  (6)  the  street-car  card  has  also 
color  possibilities;  (7)  street-car  advertising  has  an  element 


ECONOMICS  OF  ADVERTISING  441 

of  flexibility,  it  may  be  confined  to  a  single  car  line,  or  it 
may  cover  the  entire  city.  It  is  said  that  in  New  York  City 
one  can  buy  Fifth  Avenue  space,  Broadway  space,  and 
subway  space.  (8)  The  street-car  card  is  also  protected 
from  the  weather  and  retains  its  freshness;  (9)  the  adver- 
tising matter  on  street-car  cards  is  censored  by  the  state 
public-service  commission;  (10)  the  cost  of  this  medium  of 
advertising  is  relatively  small,  the  average  has  until  re- 
cently been  about  fifty  cents  a  month.  The  range  is  from 
thirty  cents  to  two  dollars  for  the  period  of  a  month.  The 
highest-priced  surface-car  rates  are  on  the  Broadway  line  in 
New  York  City.  (11)  Before  the  advent  of  the  automobile, 
at  any  rate,  the  street-car  card  was  a  cosmopolitan  medium 
because  all  classes  of  people  rode  in  the  cars;  (12)  all  space 
is  carefully  standardized;  (13)  the  cards  may  be  purchased 
for  a  year  or  for  shorter  periods. 

Against  the  use  of  street-car  advertising,  there  have 
been  the  arguments  that  there  is  a  dominant  element  of 
monotony  in  the  cards,  that  all  are  the  same  size,  that  the 
position  is  above  the  level  of  the  eyes  of  the  passenger, 
and  that  he  usually  prefers  to  look  out  of  the  window. 
The  cars  may  stand  in  the  barns  for  long  periods  of  time. 
These  cards  are  relatively  small  as  compared  with  outdoor 
advertisements.  Finally,  the  dimensions  of  the  card  limit 
the  advertising  possibilities  because  of  their  narrowness. 

260.  Window  Displays. — Merchants  have  for  a  long  time 
realized  the  value  of  making  the  goods  sell  themselves. 
They  have,  therefore,  placed  merchandise  within  the  sight 
of  the  prospective  customer,  either  on  the  shelves  or 
counters,  or  in  the  windows.  Only  within  recent  years, 
however,  has  serious  attention  been  given  to  the  art  of 
window  display.  So  far  has  this  method  of  advertising 
been  developed  that  it  has  affected  the  construction  of 
retail  stores  and  of  many  manufacturing  establishments. 
A  special  business  of  window  dressing  has  also  developed 


442  MARKETING 

and  the  principles  of  artistic  effect  have  been  studied  with 
a  view  to  making  the  retail  store  windows  as  attractive  as 
possible. 

The  progressive  merchant  of  to-day,  therefore,  lives  in 
a  glass  house.  He  no  longer  closes  his  windows  with 
shutters  at  night,  nor  does  he  make  them  narrow,  so  that 
they  may  be  easily  defended  against  possible  burglars.  On 
the  contrary,  he  has  given  careful  study  to  the  question  of 
securing  the  best  possible  light  and  the  greatest  possible 
space  for  the  display  of  his  goods.  Certain  department 
stores  charge  against  the  window  space  on  the  first  and 
second  floors  a  specific  percentage  of  overhead  cost  as 
advertising  expenditure.  Experiment  has  shown  that 
window  displays  are  an  effective  method  of  advertising 
goods. 

261.  Catalogues. — The  mail-order  houses  have  demon- 
strated the  effectiveness  of  advertising  by  means  of  cata- 
logues. So  essential  a  characteristic  of  the  mail-order 
houses  is  this  sales  medium  that  they  are  frequently  called 
catalogue  houses.  They  charge  against  each  article  the 
amount  of  space  which  it  occupies  in  the  catalogue  and 
maintain  it  in  stock  or  drop  it  according  to  whether  or  not 
it  pays  its  way. 

Other  retail  establishments,  as  well  as  wholesale  estab- 
lishments, have  proved  the  value  of  catalogues  as  a  means 
of  advertising.  Many  retail  stores  send  out  seasonal  cata- 
logues announcing  special  types  of  style  goods  and  present- 
ing in  an  attractive  way  the  new  fashions  and  modes  of 
dress.  These  catalogues  are  most  effective  in  advertising 
dress  goods  and  home  decorations,  but  may  be  used  for 
many  different  types.  In  addition  to  the  seasonal  catalogue 
there  are  often  special  bargains  that  are  announced  by 
this  method.  Catalogues  frequently  are  sent  at  the  time  of 
the  visits  of  traveling  salesmen  or  are  sent  between  visits  to 
retailers.     The    catalogue   offers   many   opportunities  for 


ECONOMICS  OF  ADVERTISING  443 

artistic   effect   and   frequently   proves   to   be  an  effective 
means  of  educational  advertising. 

262.  "Dealer  Helps." — Manufacturer,  jobber,  and  re- 
tailer have  certain  interests  in  common.  It  is  to  their 
mutual  advantage,  for  instance,  to  sell  as  great  a  volume 
of  goods  as  possible,  if  the  margin  of  profit  is  satisfactory. 
Within  this  field  there  is  a  splendid  opportunity  for  coop- 
eration. Manufacturers  have  found  it  to  their  advantage 
to  assist  their  dealers  with  various  kinds  of  advertising 
material.  These  may  consist  of  window-displays,  or 
calendars,  or  other  media.  Many  manufacturers  cooperate 
with  the  retailers  in  local  advertising  campaigns. 

The  jobber  is  also  interested  in  cooperating  with  the 
retailer  for  the  purpose  of  selling  the  largest  possible 
volume  of  goods.  He  may,  therefore,  furnish  the  dealer 
with  various  kinds  of  window-cards  or  other  announce- 
ments and,  like  the  manufacturer,  may  share  the  expense 
of  local  advertising  campaigns. 

Whenever  the  manufacturer  or  the  jobber  joins  with  the 
dealer  in  an  advertising  campaign,  the  cooperation  is 
usually  called  "dealer  helps."  Underlying  this  entire 
movement  are  the  problems  of  identification  and  control  of 
consumer  demand.  The  manufacturer  and  the  jobber,  by 
advertising  for  the  purpose  of  developing  good  will,  have 
become  identified  with  the  goods  in  the  minds  of  the  con- 
sumers. The  retailer,  under  these  circumstances,  runs  the 
risk  of  becoming  nothing  more  than  an  order  taker.  Within 
a  limited  area,  however,  cooperation  in  sales  effort  can  be 
made  mutually  helpful. 

263.  Demonstrators. — In  the  sale  of  those  goods  which 
require  special  knowledge  on  the  part  of  the  consumer,  or 
for  which  he  requires  education,  demonstrators  have  been 
found  an  effective  means  of  advertisement.  The  manu- 
facturers of  such  goods  will  frequently  place  in  the  retail 
store  demonstrators  whose  purpose  is  to  develop  new  wants 


444  MARKETING 

or  to  teach  the  consumer  how  to  secure  the  best  satisfac- 
tion from  the  goods.  Jobbers  may  use  the  same  method. 
Even  the  retailers  may  find  this  a  successful  means  of  sell- 
ing such  goods.  The  use  of  demonstrators  is  sufficiently 
important  to  require  special  attention. 

264.  Checking  Up  Returns.— One  of  the  most  difficult 
problems  connected  with  advertising  is  the  determining  of 
returns.  These  results  may  be  either  one  of  two  kinds: 
immediate,  or  direct,  results,  and  long-run,  or  indirect, 
results.  Many  instances  have  been  cited  where  the  return 
on  a  definite  advertisement  has  come  after  the  merchant 
had  ceased  handling  the  goods  and  the  manufacturer  had 
ceased  to  make  them.  Only  an  estimate  can  therefore  be 
made  of  the  direct  results  of  advertising.  Indirectly  all 
advertisements  work  continuously,  so  long  as  they  remain 
in  the  minds  of  the  consumers. 

Various  devices  have  been  suggested,  most  of  them  of  a 
mechanical  character,  to  check  up  advertising  results. 
Advertisements  have  been  "keyed"  by  inserting  a  figure 
or  letter  or  by  some  other  simple  device,  so  as  to  identify 
all  correspondence  with  the  particular  kind  of  advertise- 
ment. All  of  these  devices  are  helpful  and  will  enable  the 
advertiser  to  plan  his  campaign  with  greater  intelligence. 
On  the  whole,  however,  the  advertiser  must  be  willing  to 
wait  for  long-run,  indirect  results. 

Suggestions  for  Study 

The  student  should  study  at  this  point  the  economics 
of  advertising  in  connection  with  his  special  commodity. 
The  following  will  serve  as  topics  for  classroom  discussion : 

General — Media  of  Advertising 

1.  Definition  of  medium. 

2.  Medium  and  the  product. 


ECONOMICS  OF  ADVERTISING  445 

3.  Medium  and  the  market. 

4.  Medium  and  returns — direct  and  indirect. 

5.  Medium  and  business  habits. 

6.  Cost  of  media,  basis  of  charge,  unit  used,  wastage,  etc. 

7.  Social  control  of  media. 

8.  Media  and  the  distributive  organization. 

Magazines  and  Newspapers 

1.  Newspapers  vs.  magazines  as  media. 

2.  Analysis  of  circulation  data. 

3.  Media  and  news. 

4.  Advertising  rates. 

5.  Media  and  national  advertising. 

6.  Media  and  literary  articles. 

7.  Psychological  factors  in  these  media. 

8.  Advertising  and  editorial  policy. 

9.  Classification  of  newspapers  and  magazines  as  to  purpose, 
appeal,  content,  class  of  readers,  methods  of  reading. 

10.    Free  publicity  in  newspapers  and  magazines. 

House  Organs,  Trade  Journals  and  Other  Publications 
of  the  Sort 

1.  Origin  and  development. 

2.  Compare  with  periodicals  and  newspapers  as  to  circulation, 
cost,  content. 

3.  Elimination   of  wastage. 

4.  Value  of  technical  information. 

5.  Compare  and  contrast  technical   and  trade  journals. 

6.  Show  where  these  specialized  media  fit  into  the  distributive 
system. 

7.  Sum  up  their  advantages  and   disadvantages. 

Window  Displays 

1.  Origin  and  purpose. 

2.  Relation  to  the  distributive  organization. 

3.  Cost  of  displays. 


446  MARKETING 

4.  Value  of  motion,  color,  and  light  in  displays. 

5.  Displays  and  dealer  service. 

6.  Who  pays  for  this  form  of  advertising? 

7.  The  contest  for  the  dealer's  window. 

8.  This  medium  as  related  to  the  character  of  the  commodity. 

9.  Window  displays  and  dealer's  profits. 
10.  What  should  go  into  a  window  display? 

Outdoor  Advertising 

1.  Define    "listed,"     "protected,"    "renewed,"     "guaranteed," 
postings. 

2.  Cost  data  for  outdoor  advertising. 

3.  Methods  of  securing  outdoor  space. 

4.  The  appeal  of  outdoor  advertising. 

5.  What  outdoor  advertising  should  contain. 

6.  Social  point  of  view  in  outdoor  advertising. 

7.  What  classes  of  products  are  adapted  to  outdoor  advertis- 
ing. 

8.  The  kind   of  returns  expected  from  outdoor  advertising. 

Street-Car  Advertising 

1.  Cost  data  in  street-car  advertising. 

2.  Psychological    considerations   in    street-car    advertising. 

3.  Products  adapted  to  this  kind  of  advertising. 

4.  Standardization  of  street-car  advertising. 

5.  Social  point  of  view  in  street-car  advertising. 

6.  Kind  of  returns  from  street-car  advertising. 

7.  The  content  of  street-car  advertising. 

Checking  Up  Returns 

1.  Mechanical  methods  of  securing  data. 

2.  Difficulties  in  the  way  of  getting  reliable  data, 

3.  Application  of  statistical  methods  to  the  problem. 

4.  The  problem  of  immediate  and  remote  returns. 

5.  The  problem  of  frequency  and  repetition. 

6.  The  problem  of  duplication. 

7.  The  "laboratory  method." 


ECONOMICS  OF  ADVERTISING  447 

Readings  : 

Modern  Business,  vol.  ix,  Part  I,  Chaps.  V,  VI. 

Advertising    and   Selling,    January,   1906,    p.    999;    February, 

1913;  May,  1913;  January,  1907,  p.  848;  March,  1914;  June 

1906,  p.  38;  October,  1911,  p.  62;  October,  1906,  p.  489; 

January,  1912,  p.  80. 
Printer's  Ink,  March  5,  1914;  September  26,  1912;  April  3, 

1913;  July  31,  1913;  July  23,  1914,  p.  75;  September  18, 

1913,  p.  37;  August  29,  1912;  March  6,  1913;  April  8,  1913; 
May  7,  1914,  p.  50;  May  28,  1914,  p.  23;  November  12, 

1914,  p.  17;  November  26,  1914,  p.  37;  December  10,  1914, 
p.  76;  October  16,  1913,  p.  37;  April  9,  1914,  p.  71;  April 
16,  p.  78;  April  23,  pp.  70,  S6. 

Farrington,   Retail  Advertising   Complete,   Chap.   VIII. 

Chapman,  Law  of  Advertising  and  Selling. 

Hollingworth,  Advertising  and  Selling,  Chap.  III. 

Calkins,  Business  of  Advertising,  Chap.  II,  pp.  44-46. 

and  Holden,  Modem  Advertising,  Chap.  IV,  pp.  91-94. 

Cherington,  Advertising  Book,  1916,  Chap.  X. 

Bunting,  Elementary  Laws  of  Advertising,  Chap.  XXV. 

De  Weese,  Practical  Publicity,  "The  Magazine  and  Newspa- 
pers," p.  80;  "Relative  Value  of  Magazine  Pages,"  pp.  95, 
208-219,  174-181,  149-154. 

Mahin,  Advertising  Data  Book,  pp.  26-110,  113-116,  118-316, 
427-428;  Chap.  VII. 

Opdycke,  News,  Ads  and  Sales,  Part  I. 

Moran,  Business  of  Advertising,  Chaps.  Ill,  IV. 

Scott,  Psychology  of  Advertising,  Chaps.  XV,  XVI. 

,  Theory  of  Advertising,  Chap.  VI. 

Tipper,  Hollingworth,  etc.,  Principles  and  Practice  of  Adver- 
tising, Chaps.  XXX,  XXXII,  XXXIII,  XXXIV,  XXXVI. 

System,  February,  1913,  p.  170. 

Richardson,  The  Power  of  Advertising,  Chaps.  XI,  XVIII. 

Modern  Business,  vol.  iv,  pp.  172-9;  "How  to  Write  Ads  That 
Sell,"  Part  V,  Chap.  XVII. 

Hall,  Writing  an  Advertisement,  Chap.  XVI. 

Shaw,  Some  Problems  in  Market  Distribution,  pp.  107-119. 

Ramsay,  Effective  House  Organs. 


CHAPTER  XXI 

MERCHANDISING   COSTS  AND  PRICES 

Somewhere  between  farm  or  shop  and  the  consumer  an 
increase  in  price  of  from  25  per  cent  to  60  per  cent  is 
made.  "Forty  per  cent  of  the  price  paid  by  the  ultimate 
consumer  for  a  pair  of  shoes,"  it  has  been  said,  "is  con- 
sumed in  getting  the  shoes  to  him  from  the  manufacturer, 
exclusive  of  the  manufacturer's  profit,  that  is,  in  market- 
ing them. ' ' 1  What  factors  of  expense  have  entered  this 
price  to  the  ultimate  consumer,  and  what  the  chief  deter- 
mining influences  are  in  that  price  are  considerations 
worthy  of  particular  attention.  The  actual  figures  will 
change  from  time  to  time,  but  the  fundamental  factors  and 
influences  will  remain. 

The  factors  of  expense  are  the  cost  of  the  goods,  includ- 
ing buying  expense,  the  cost  of  handling  them,  including 
rent,  interest,  and  all  operating  expense,  and  the  cost  of 
selling  them,  including  advertising.  The  influences  affect- 
ing price  are  far  more  subtle  and  intangible.  Among  them 
are  demand  relative  to  supply,  competition,  style,  weather, 
climate,  government  control,  foreign  influences,  custom, 
influences  affecting  allied  commodities,  tariff,  and  many 
psychological  influences.  Prices,  especially  retail  prices, 
tend  to  crystallize  into  systems  which  enable  them  to  with- 
stand greater  shocks,  but  which  also  make  influences  more 
widely  felt  when  a  break  comes.  It  is  proposed  to  discuss 
here  some  of  these  factors  and  influences  in  the  prices  of 
manufactured  products. 

1  Annals  of  the  American  Academy  of  Political  and  Social  Science, 
May,  1915. 

448 


MERCHANDISING  COSTS  AND  PRICES  449 

265.  Factors  of  Expense. — The  problem  of  determining 
and  of  allocating  costs  is  one  for  the  accountant.  The 
manufacture  of  goods  affords  a  wide  field  for  cost  account- 
ing, especially  as  a  means  for  more  intelligent  business 
management.  Where  the  manufacturer,  however,  organizes 
a  sales  department  and  does  advertising,  he  faces  problems 
of  the  same  kind  as  those  of  the  merchant.  In  fact,  the 
manufacturer  becomes  a  merchant. 

The  merchant  generally  has  been  negligent  in  his  keep- 
ing of  accounts  in  the  past.  There  are  many  organiza- 
tions to-day,  however,  that  are  urging  upon  him  the  need 
for  careful,  standardized  accounts.  He  is  beginning  to 
awaken  to  the  fact  that  intelligent  direction  of  his  business 
demands  an  intimate  acquaintance  with  costs.  In  aiming 
at  an  intelligent  price  policy,  such  knowledge  is  essential. 
Especially  is  this  true  for  the  retailer.  He  must  know, 
for  instance,  that  if  he  is  a  furniture  dealer,  his  rent  item 
will  be  the  heavy  one  relatively.  If  he  retails  shoes,  clerk 
hire  will  mount.  In  a  retail  jeweler's  store,  turnovers  are 
slow  and  investment  is  heavy.  In  a  five-  and  ten-cent  store, 
the  small  margin  of  profit  on  each  sale  demands  at  least  six 
turnovers  of  goods  per  year,  and  in  a  department  store  the 
rising  costs  of  service  need  careful  watching. 

When  the  store  is  a  going  concern,  the  initial  expenditure 
in  the  merchandising  cycle  is  for  the  goods  themselves. 
This  is  an  investment  problem,  for  the  working  capital  is 
tied  up  in  the  stock  until  it  is  returned  through  sales. 
The  expenditure  should  be  made  only  upon  the  basis  of 
a  full  knowledge  of  the  goods  and  the  market.  Goods  are 
bought  to  be  sold  at  a  profit,  and  the  purchasing  must  be 
done  intelligently.  It  has  been  estimated  that  in  retail 
shoe  stores  the  buying  expense,  that  is,  the  percentage  to 
be  charged  to  the  expense  of  the  purchasing  department 
or  to  the  buyers,  ranges  from  .8  per  cent  to  1.8  per  cent 
of  the  net  sales. 


450  MARKETING 

The  cost  of  handling  goods  includes  the  freight,  the 
cartage,  receiving,  unpacking,  storing,  rent,  interest,  and 
minor  items  such  as  insurance,  heat,  light,  taxes,  telephone, 
etc.  Of  these  items  the  heaviest  one  is  likely  to  be  rent. 
Estimates  for  rent  run  from  2  per  cent  to  over  14  per  cent 
of  sales.2  The  wide  divergence  is  due  to  differences  in  location 
and  the  size  of  the  town.  The  amount  of  interest  will  be  de- 
termined by  the  relative  expense  of  stock  and  the  rapidity 
of  turnover.  For  the  shoe  dealer,  the  percentage  of  net 
sales  varies  from  1  per  cent  to  7.9  per  cent.  The  rest 
of  the  charges  are  variable  and  of  minor  importance.  Care- 
ful account,  however,  should  be  kept  of  them. 

Every  store  has  its  expenses  for  management  and  the 
office  force.  It  is  necessary  to  have  these  carefully  allocated. 
This  overhead  charge  must  bring  returns  through  intelligent 
direction  and  efficiently  "facilitating"  of  operations. 

Another  part  of  the  cost  of  merchandising  is  the  cost  of 
selling,  including  advertising.  Of  this  cost  there  are  two 
main  items;  one  is  the  expense  of  the  sales  force,  and  the 
other  is  advertising  in  all  its  forms.  The  total  expense 
of  selling  will  vary  with  the  effectiveness  of  management, 
the  character  of  goods,  the  size  and  character  of  the  market, 
conditions  of  business,  and  as  to  whether  the  establishment 
is  a  new  one  or  one  well  known  and  long  established.  Cer- 
tain goods  at  certain  times  may  "sell  themselves";  there 
may  be  a  seller's  market  or  a  buyer's  market. 

The  variations  in  selling  costs  are  shown  by  the  follow- 
ing estimates : 3 

Cost  to  Sell  Per  Cent 

Dry  goods  about 23.05 

Groceries  about  17.91 

Notions  in  variety  store  about 17.76 

Hardware  about 20.41 

*  Nystrom,  Economics  of  'Retailing,  p.  132. 

%  Cf.  Sammona,  Keeping   Up  with  Rising  Costs,  pp.  20-30. 


MERCHANDISING  COSTS  AND  PRICES  451 

Cost  to  Sell  Per  Cent 

Clothing  about 23.47 

Drugs  about  24.65 

Furniture  about 26.51 

Jewelry  about   26.81 

Shoes  about   23.22 

Selling  by  a  mail-order  house  through  catalogues,  letters, 
and  newspaper  advertisements  costs  about  7.21  per  cent 
of  net  sales.  The  retailers  of  farm  machinery  were  paying 
a  few  years  ago  an  average  of  about  17  per  cent  on  sales. 
The  average  selling  cost  for  manufacturers  of  women's 
muslin  underwear  has  been  estimated  by  Government  in- 
vestigators at  about  7.53  per  cent;  the  expenses  for  certain 
ones  of  these  manufacturers  ran  about  3.24  per  cent  for 
sales  force.  The  selling  expenses  of  book-paper  mills  in 
1916  were  about  $77.50  to  $90  per  ton.  Jobbers  in  news- 
print paper  claim  an  average  cost  of  doing  business  at 
from  12  per  cent  to  17  per  cent,  which  includes  a  profit. 

Records  from  650  retail  shoe  stores,  upon  analysis, 
showed  the  results  given  in  the  table  below :  4 


Item 

Lowest 

per- 
centage 

Highest 
percentage 

Percentage  about 
which  data  center 
(not  an  average) 

Percentage  about 
which  a  concen- 
tration is  sufficient 
to  indicate  a  rea- 
lizable standard 

Gross    profit,     including 

20 

18 

0.8 
5.0 
0.0 
0.0 
1.8 
1.0 

42 

35 

1.8 
10.3 

8.8 

1.4 
14.6 

7.9 

Low  grade  23-25 
High  grade  30-33 

Low  grade  23 
High  grade  27 

1.1 

8.0 

2.0 

0.6 

5.0 

2.5 

Total  operating  expense 
not    including    freight 
and    cartage    and    in- 

Low  grade  20 
High  grade  25 

1.0 

7.0 

1.5 

0.4 

Rent 

3.0 

2.0 

1.0 

$5,000 

3.6 
$16,500 

1.8 
$10,000 

2.5 

Annual  sales  of  average 

*  Bulletin  of  the  Bureau  of  Business  Research,  Harvard  Univer- 
aity,  No.  1,  p.  14. 


452  MAEKETINQ 

Tho  paying  of  salesmen  may  be  merely  a  simple  wage, 
paid  daily,  weekly,  or  monthly.  Or  there  may  be,  for  pur- 
poses of  stimulating  interest  and  of  unifying  the  sales  ef- 
fort, certain  commissions  or  bonuses  offered.  Commis- 
sions, bonuses,  and  profit-sharing  plans  have  proved  help- 
ful for  traveling  salesmen  in  many  instances.  The  same 
methods  can  be  used  with  department  and  sales  managers. 

Salesmen,  on  the  whole,  are  a  relatively  low-paid  group. 
The  total  expense  for  the  sales  force,  however,  is  usually 
the  chief  item  in  selling  cost  and  needs  careful  considera- 
tion. The  advertising  appropriation  usually  ranges  from 
a  fraction  of  1  per  cent  to  5  per  cent  of  the  sales  expense. 
The  methods  used  in  determining  the  amount  of  appropria- 
tion for  advertising  have  been  stated  as  follows 5  : 

1.  Apportioning  a  percentage  of  the  gross  business  of  the 
previous  year. 

2.  Apportioning  a  percentage  of  the  net  profits  of  the  pre- 
vious year. 

3.  A  progressive  advertising  appropriation,  in  proportion  to 
the  current  increase  over  sales  during  the  same  period  in 
the  previous  year,  monthly  or  quarterly. 

4.  Grading  the  appropriation  according  to  the  plans  for  the 
ensuing  year,  based  on  constructive  analysis. 

266.  Commissions  for  Jobbers  and  Brokers. — Generally 
speaking,  the  increase  in  price  of  commodities  passing 
through  the  hands  of  jobbers  or  brokers  is  determined  on 
the  basis  of  a  definite  percentage.  This  percentage  varies 
from  iy2  to  3  per  cent  or  more  on  the  cost  price.  Out  of 
this  the  middleman  pays  the  expense  for  handling  the 
goods  and  secures  his  profit.  For  the  brokers,  the  operat- 
ing expense  is  very  low,  mostly  comprising  a  small  office 
force  and  a  small  amount  of  space.  It  is  to  be  remembered 
that  brokers,  as  such,  never  come  into  possession  of  the 

"Hess,  Productive  Advertising,  p.  183. 


MERCHANDISING  COSTS  AND  PRICES  453 

goods  which  they  sell,  and  do  not  need  facilities  for 
handling  them.  The  percentage  which  they  claim  is  dis- 
tinctly a  payment  for  service.  In  the  case  of  jobbers,  the 
expenses  are  much  larger,  although  usually  they,  like 
brokers,  charge  a  definite  percentage.  These  middlemen, 
like  the  retailer,  must  calculate  carefully  the  items  of 
expense,  so  that  they  may  adequately  determine  the  neces- 
sary increase  in  price. 

267.  Who  Pays  for  Advertising? — A  question  that  has 
been  widely  discussed,  both  by  economists  and  by  business 
men,  is  who  pays  the  advertising  bills?  This  query  is  not 
of  fundamental  importance,  because  the  effectiveness  of 
advertising  has  long  since  been  demonstrated.  It  may  be 
well,  however,  to  see  definitely  what  lies  behind  the 
question. 

It  is  clear  in  the  first  place  that  the  bill  for  advertising 
is  sent  to  the  advertiser.  For  the  moment,  therefore,  he 
pays  the  expenses.  This  advertiser,  however,  may  charge 
the  amount  which  he  has  spent  for  his  advertising  campaign 
either  as  an  investment  or  as  an  expense.  In  any  case, 
his  policy  will  be  to  get  the  money  back  with  interest. 
Whether  he  accomplishes  his  purpose  or  not,  it  is  obvious 
that  he  expects  to  make  the  advertising  expense  a  part 
of  the  price  of  his  goods.  This  holds  true  whether  the 
advertiser  is  manufacturer,  jobber,  or  retailer. 

The  advertiser  may  secure  repayment  either  by  accumu- 
lating a  return  from  more  units  of  goods  sold  or  from  a 
lowered  production  or  handling  cost  per  unit  or  from  both. 
The  general  principle,  therefore,  is  that  the  man  who 
spends  money  for  advertising  tries  to  shift  that  expense 
by  (1)  getting  more  people  to  spend  their  money  for  his 
goods;  (2)  getting  people  to  spend  more  money  for  his 
goods;  (3)  by  a  combination  of  the  first  two  ways. 

If  the  advertiser  fails  in  his  advertising  campaign,  that 
is,  if  he  is  not  able  to  accomplish  either  one  of  the  aims 


454  MARKETING 

stated  above,  his  business  must  stand  the  expense.  On  the 
other  hand,  if  he  is  successful,  that  is,  if  more  people  buy, 
they  do  so  either  by  substituting  these  advertised  goods 
for  other  goods,  or  by  spending  more  of  their  earnings. 
Furthermore,  if  they  substitute  advertised  goods  for  others, 
some  manufacturer,  jobber,  or  merchant  loses  a  part  of 
his  trade.  On  these  conditions,  he  would  lose  what  the 
advertiser  makes.  If  people  spend  more  money  as  a  result 
of  advertising,  they  pay  either  from  increased  purchasing 
power  or  by  saving  less. 

A  further  consideration  in  this  connection  is  that  every 
dealer  in  advertised  goods  will  so  price  those  goods  as 
to  return  him  all  cost,  including  advertising  bills,  plus  a 
profit.  In  other  words,  every  price  of  every  advertised 
product  under  normal  conditions  has  as  one  of  its  elements 
advertising  expense.  It  may  be  true,  however,  that  in 
particular  cases  the  advertiser  may  be  able  by  increased 
volume  of  business  actually  to  lower  the  price  which  he 
charges.    The  essential  question  is  still  unanswered. 

It  is  estimated  that  more  than  $1,000,000,000  are  spent 
annually  in  advertising  campaigns.  Is  this  amount  an 
expenditure  for  real  service?  Is  it  merely  for  the  buyer's 
privilege  of  purchasing  a  certain  brand  of  goods  at  a  price 
which  includes  the  expense  of  advertising,  or  of  buying 
a  certain  dealer's  goods  instead  of  those  handled  by 
another  at  the  same  price,  or  of  buying  advertised  goods 
at  a  less  price  than  would  be  necessary  to  charge  without 
advertising?  In  other  words,  would  the  cost  of  distribu- 
tion be  greater  or  less  if  the  $1,000,000,000  were  not  paid? 
That  A  takes  B's  trade  away  from  him  is  not  absolute 
proof  of  greater  service  or  of  greater  efficiency.  That  the 
public  now  buys  package  and  canned  goods  at  a  consider- 
ably higher  price  than  is  charged  for  goods  in  bulk  is  not 
absolute  proof  of  greater  service  or  greater  efficiency. 

It  has  been  said  in  defense  of  advertising  that  this  expen- 


MERCHANDISING  COSTS  AND  PRICES  455 

diture  is  an  investment  in  goodwill.  The  character  and 
quality  of  certain  goods  are  by  means  of  advertising  asso- 
ciated with  the  maker  of  the  products,  or  the  merchant  who 
sells  them.  This  defense  is  not  wholly  satisfactory.  Should 
the  customer  be  charged  for  goodwill?  Is  not  this  the 
old  question  of  paying  for  honesty?  In  modern  business, 
is  not  honesty  that  must  be  paid  for  too  dear  at  any  price  ? 

It  is  from  such  considerations  as  these  that  economists 
have  said  the  advertising  expense  is  a  social  waste.  The 
contest  between  merchants  and  manufacturers  to  secure 
buyers  when  these  manufacturers  and  merchants  offer 
practically  the  same  character  and  quality  of  goods  means 
a  duplication  of  effort;  hence  a  waste  of  social  energy. 
It  is  also  pointed  out  that  the  standardization  and  identifi- 
cation of  goods  may  have  the  effect  of  toning  up  quality 
and  of  simplifying  the  process  of  distribution  of  these 
goods. 

A  further  consideration  is  that  advertising  service  is  a 
great  directive  force  in  modern  business.  If  it  is  carried 
on  with  honesty  and  intelligence,  the  purchasing  power 
of  the  consumer  will  be  directed  more  wisely  than  if  adver- 
tising did  not  exist.  Clearly  advertising  is  an  appeal  to 
the  consumer,  and  with  the  tremendous  expenditure  in 
these  modern  days,  it  is  no  doubt  a  large  factor  in  direct- 
ing the  purchases  which  he  makes.  There  is  further  a 
grave  responsibility  on  the  advertiser  to  deal  fairly  and 
honestly  with  the  consumer  in  carrying  on  his  advertising. 

268.  Buying  Advertising  Space. — It  was  originally  the 
duty  of  the  advertising  agency  to  be  a  broker  of  advertising 
space.  It  acted  as  an  intermediary  between  the  financial 
manager  of  the  newspaper  or  magazine  and  the  manufac- 
turer or  merchant  who  had  goods  to  sell.  As  the  power  of 
advertising  became  more  and  more  clearly  recognized,  the 
amount  of  space  in  the  various  media  was  greatly  increased. 
To-day   it   is   generally   conceded   that  the   returns  from 


456  MARKETING 

advertising  are  essential  for  the  financial  success  of  all 
newspapers  and  magazines.  The  charge  for  advertising 
space  in  these  media  is  a  charge  for  service  which  they 
perform.  This  service  of  publicity  is  determined  by  several 
factors.  The  first  of  importance  is  the  amount  of  circula- 
tion. Of  almost  equal  importance  is  the  character  of  the 
reading  public  which  it  reaches.  The  character  of  the 
periodical  itself,  the  number  of  advertisements  which  it 
carries,  the  time  of  day  when  it  appears,  or  the  time  of 
month,  are  all  considerations.  Analogous  factors  enter  into 
the  charge  for  other  media,  such  as  billboards,  street- 
car cards,  etc.  Practically  the  charge  for  space  is  also 
modified  by  the  character  of  the  insertion.  One  periodical 
divides  the  modifying  factors  in  its  charges  into  position, 
display  in  fixed  space,  display  on  open  contract,  reading 
notices,  and  classified  advertisements. 

The  buying  of  space  in  advertising  media  is  a  problem 
which  requires  special  study.  The  point  to  be  noted  in 
this  connection,  however,  is  that  the  most  important  charge 
in  advertising  expense  is  the  buying  of  space. 

269.  Price  Influences. — Upon  the  problem  of  determin- 
ing the  price  that  shall  be  set  by  the  manufacturer  upon 
goods  which  he  has  made,  by  the  jobber  upon  the  goods 
which  he  handles,  and  by  the  merchant  in  retail  trade  on 
his  stock  is  concentrated  the  best  judgment  of  the  business 
world.  The  price  to  be  asked  is  set  after  all  factors  have 
been  carefully  considered.  It  is  in  fact  the  culmination 
of  a  process  of  careful  analysis.  If  it  is  done  with  in- 
telligence, there  will  be  behind  it  a  comprehensive  analysis 
of  the  commodity,  its  market,  and  all  of  the  essential  costs. 
Some  of  the  important  considerations  which  enter  into  the 
setting  of  price  are  examined  here. 

The  chief  consideration  is  the  relation  of  raw  materials 
to  the  price  of  manufactured  goods.  In  some  instances, 
the   relationship   is   not  of   great   importance.     In   other 


MERCHANDISING  COSTS  AND  PRICES  457 

cases,  the  price  of  raw  materials  is  practically  the  dominat- 
ing factor.  It  is  often  the  case  that  the  price  of  raw 
materials  will  fluctuate  far  more  than  the  price  of  the 
products  made  from  them.  This  is  true,  for  instance,  of 
crude  petroleum  and  its  products.  Experience  during  the 
period  of  the  war  demonstrated  the  fact  that  the  crude 
petroleum  prices  ran  immediately  in  sympathy  with  the 
existing  condition  of  production.  The  violent  fluctuations 
that  occurred  in  the  prices  of  crude  petroleum  were  not 
to  be  found  in  the  prices  of  petroleum  products.6 

In  the  case  of  the  prices  of  tobacco  and  tobacco  products, 
experience  during  the  last  few  years  has  shown  that  the 
raw  material  price  rose  considerably,  quite  a  long  time 
before  the  price  of  the  finished  products.  "Prices  of 
finished  tobacco  products  did  not  begin  to  rise  in  earnest 
until  the  last  half  of  1917,  three  years  after  the  outbreak 
of  the  war,  and  two  years  after  the  beginning  of  the  gen- 
eral rise  in  prices.  On  the  whole,  their  rise  lagged  behind 
the  rise  of  prices  of  tobacco  leaf. ' ' 7 

In  this  case,  the  price  of  the  finished  product  began  to 
increase  about  the  middle  of  1917.  The  reason  given  for 
the  slowness  in  response  to  raw  material  prices  is  the  fear 
of  injuring  the  market  for  well-known  brands. 

Tobacco  products  have  long  been  marketed  to  the  consumer 
on  the  basis  of  brands  at  a  price  in  a  convenient  number  of 
cents  (as  a  five-cent  cigar,  five-cent  package,  etc.),  so  that  the 
brand  and  price  became  closely  associated  in  the  mind  of  the  con- 
sumer. It  was  only  after  an  extensive  advertising  campaign 
on  the  necessity  of  increasing  the  price  that  an  attempt  to  raise 
it  was  made.  It  was  largely  this  factor  of  the  marketing  situa- 
tion which  prompted  postponement  of  the  rise  in  price  of  the 

•War  Industries  Board,  Price  Bulletin  No.  36,  "Prices  of  Petro- 
leum and  its  Products,"  pp.  49-54. 
7  War  Industries  Board,  Price  Bulletin  No.  19,  p.  8. 


458  MAEKETING 

finished  product,  while  at  the  same  time  the  factor  of  relatively 
cheap  raw  materials  made  it  possible  to  do  so  without  loss  to  the 
manufacturer.8 

Even  in  the  case  of  allied  goods,  such  as  that  found 
in  building  materials,  the  relation  between  the  price  of  raw 
materials  and  the  finished  product  is  frequently  quite 
diverse.  The  study  made  by  the  Government  into  the  prices 
of  building  materials  shows  that  the  increase  in  prices  of 
finished  products  did  not  come  at  the  same  time  or  for 
the  same  reason.  The  price  of  stone,  for  instance,  was 
advanced,  in  some  cases,  in  direct  conformity  with  the 
rising  cost  of  production  and  without  regard  to  the  rapid 
decline  in  the  demand  for  building  material.  In  the  case 
of  marble,  limestone,  and  granite,  the  prices  were  not 
raised  to  correspond  to  raw  material  prices.  In  the  case 
of  paint,  the  price  rose  to  a  higher  point  than  that  of 
any  other  building  material  with  the  exception  of  steel,  due 
directly  to  the  increased  price  of  materials  and  especially 
of  linseed  oil.  The  price  of  nails,  also,  advanced  more 
rapidly  than  that  of  almost  all  other  building  materials  be- 
cause of  the  demand  for  steel.9 

There  are  often  artificial  influences  which  interfere  with 
the  correspondence  of  raw  material  prices  to  the  prices  of 
finished  products.  This  condition  was  illustrated  during 
the  war  by  the  rapid  changes  in  the  prices  of  certain  manu- 
factured goods.  In  the  case  of  buttons  made  from  ocean- 
pearl  shells,  there  was  a  steady  decline  in  price  from  1913 
to  1917,  with  but  a  slight  recovery  the  following  year. 
The  reason  for  this  was  the  closing  by  blockade  of  the 
principal  European  markets,  and  the  submarine  dangers. 
In  this  instance,  the  price  of  raw  materials  fell  while  the 
price  of  manufactured  commodities  rose  sharply. 

8  Ibid. 

"War  Industries  Board,  Price  Bulletin  No.  6,  p.  12. 


MERCHANDISING  COSTS  AND  PRICES  459 

The  relation  between  the  price  of  raw  cotton  and  cotton 
materials  remained  a  direct  one  throughout  the  period 
of  the  war.  There  is,  however,  one  peculiarity  even  in 
this  instance.  While  the  price  of  intermediate  and  finished 
cotton  products  moved  in  direct  accord  with  the  price  of 
raw  cotton,  the  margin  of  increase  of  cotton  fabrics  was 
much  greater  than  that  of  yarns,  and  the  margin  of  in- 
crease in  the  price  of  yarns  was  greater  than  that  of  raw 
cotton.  The  explanation  in  this  case  is  that  the  demand 
for  finished  fabric  was  very  urgent,  that  is,  the  goods  must 
be  had  at  once  and  at  any  cost.  There  is,  no  doubt,  another 
element  in  the  fact  that  manufacturing  costs  were  greatly 
increased  during  the  period.  Throughout  there  was  a 
speculative  element. 

In  the  case  of  silk  goods,  the  price  in  the  United  States 
is  determined  directly  by  the  trend  of  price  in  the  Yoka- 
hama  market.  This  is  due  to  the  fact  that  the  United 
States  depends  directly  upon  Japan  for  raw  silk.  It  has 
been  found,  nevertheless,  that  during  the  period  of  the 
war,  price  fluctuations  for  different  kinds  of  raw  silk 
were  not  identical.  This  divergence  was  due  to  differences 
in  grading,  in  uses,  and  to  local  conditions.  ' '  Nevertheless, 
the  Yokahama  market  sets  the  pace. ' ' 10 

The  finished  goods  may  be  by-products  of  manufacture. 
This  is  illustrated  in  the  case  of  leather.  The  hides  from 
which  leather  is  made  are  a  by-product  of  the  packing 
house,  where  animals  are  killed  primarily  for  their  meat 
and  not  for  their  hides,  from  which  the  material  for  leather 
is  obtained.  The  cost  of  production,  therefore,  becomes 
a  minor  consideration.  In  attempting  to  determine  a  fair 
price  for  leather  during  the  period  of  the  war,  it  was 
found  that  an  allowance  of  lSy2  cents  for  tanning  would 
make  the  tanner  a  profit  of  10  per   cent  annually.     A 

10  War  Industries  Board,  Price  Bulletin  No.  25,  p.  7. 


460  MARKETING 

peculiarity  in  this  case  was  that  no  consideration  could 
be  given  to  the  subject  of  turnover.  It  was  claimed  by 
the  tanners  that  there  was  only  a  single  turnover  during 
each  year. 

Another  influence  in  the  determination  of  price  is  the 
element  of  style.  In  attempting  to  fix  the  price  of  hides 
the  War  Industries  Board  discovered  that  "Not  a  small 
factor  in  causing  the  greater  advance  in  glazed  kid  leather 
and  in  women's  shoes  was  the  style  then  in  vogue  which 
ran  both  to  extreme  height  and  to  many  colors.  This  style 
caused  a  demand  both  for  a  large  number  of  shoes  and  for 
larger  quantities  of  leather  to  be  used  in  each  pair  of  shoes, 
besides  the  inevitable  loss  and  waste  due  to  the  changing 
styles,  and  the  advance  of  price  to  guard  against  this 
contingency."  1X 

Such  factors  as  this  tend  to  produce  high  prices  both 
of  leather  and  of  shoes.  There  is  in  all  style  goods  an 
element  of  speculation.  Style  is  largely  a  matter  of  taste 
and  whim  and  caprice  on  the  part  of  the  consumer.  In 
the  case  of  piece  goods  for  women's  clothing  it  has  been 
said  that 

just  what  determines  the  selling  properties  of  a  design  remains 
a  mystery  to  the  dress-goods  designer.  Two  designs  may  be 
identical  except  for  some  trifling  difference  in  structure;  one  may 
be  a  good  seller,  while  the  other  fails  to  move  at  all.  A  design 
which  has  started  being  a  good  seller  may  give  way  in  mid- 
season  to  a  pattern  which  had  shown  no  life  at  all  in  the  early 
part  of  the  year.  This  risk  of  failure  to  sell  in  the  case  of  finished 
products  cannot  be  reduced  to  anything  like  a  safe  or  economical 
minimum.  The  successful  fabrics,  therefore,  are  obliged  to  carry 
the  cost  of  the  failures.12 

Price  in  the  United  States  has  recently  been  greatly 
affected  by  governmental   influence.     This  influence  has 

"War  Industries  Board,  Price  Bulletin  No.  26,  p.  10. 
u  Cherington,   Wool  Industry,  p.   179. 


MERCHANDISING  COSTS  AND  PRICES  461 

been  exerted  in  two  different  ways.  In  the  first  place,  there 
has  been  a  direct  control  of  the  price  that  is  to  be  asked, 
which  was  either  an  absolute  setting  of  price  or  a  fixing 
of  the  percentage  of  profit.  In  the  second  place,  the  gov- 
ernment owned  enough  stocks  to  regulate  the  price  in  the 
market.  The  effect  of  government-owned  stocks  in  the 
determination  of  the  price  of  wheat  is  well  known.  The 
same  kind  of  effect  has  occurred  in  the  case  of  wool  prices 
and  the  prices  of  wool  products.  Because  the  price  of 
wool  was  so  greatly  dominated  by  the  government,  it  was 
not  possible  for  the  manufacturers  of  wool  products  to 
estimate  in  advance  how  much  they  were  likely  to  pay  for 
raw  materials.  Because  of  this  uncertainty,  a  wide  margin 
of  safety  was  demanded  in  the  price  of  woolen  cloth. 

Another  element  affecting  price  levels  in  connection  with 
government  activity  is  the  tariff.  On  the  theory  that  small 
industries  should  be  protected  against  powerful  foreign 
competitors,  an  artificial  barrier  is  set  up  in  the  way  of  a 
tariff  wall,  and  the  consumer  is  compelled  to  pay  an  added 
price  on  account  of  the  weakness  and  inefficiency  of  the 
domestic  manufacturer.  In  so  far  as  this  is  the  case,  there 
will  be  a  higher  price  for  finished  goods  in  the  market. 
It  is  obvious  that  if  the  domestic  manufacturer  cannot  meet 
his  foreign  competitor  on  equal  terms  and,  through  com- 
petition in  his  own  market,  is  compelled  to  hold  his  prices 
at  a  low  level,  there  will  be  no  additional  burden  on  the 
consumer.  Experience  in  the  United  States,  however,  has 
shown  that  a  high  tariff  tends  to  create  high  prices. 

Another  consideration  of  much  importance  is  the 
weather.  An  unusual  season  will  have  a  substantial  influ- 
ence upon  the  prices  of  certain  commodities.  This  influ- 
ence, of  course,  affects  the  prices  indirectly  through  de- 
mand or  supply.  A  late,  cold  spring  may  greatly  reduce 
the  demand  for  spring  goods.  It  may  likewise  affect  the 
market  for  farm  machinery.    In  the  larger  cities,  the  bakers 


462  MARKETING 

adjust  their  daily  supply,  in  part  at  least,  to  the  changing 
weather  conditions.  This  necessarily  is  a  local  factor  and 
is  one  of  the  general  risks  of  business. 

Beyond  these  more  or  less  tangible  factors  affecting  the 
price  of  finished  products,  there  lies  a  field  of  psychological 
influences  which  are  not  easily  traced.  The  great  dis- 
turbance throughout  the  world  in  recent  years  has  so  dis- 
organized business,  has  so  greatly  affected  both  demand  and 
supply,  that  business  men,  and  the  consumer  in  particular, 
have  lost  their  bearings.  In  more  normal  times,  the  con- 
sumer was  accustomed  to  demand  a  definite  explanation  for 
increase  in  price.  Recently,  however,  so  much  has  been 
written  about  changes  in  supply  of  materials  that  he  has 
been  trained  to  expect  repeated  increases  and  has  come 
to  accept  them  often  without  question.  It  frequently  hap- 
pens that  in  the  stock  and  produce  exchanges  the  buyers 
and  sellers  are  thrown  into  a  panic  and  prices  fluctuate 
with  great  rapidity  and  without  definite  reason. 

270.  Price  Systems. — As  has  been  said,  prices  tend 
quickly  to  settle  into  a  more  or  less  definite  system.  This 
is  particularly  true  of  the  retail  price.  Wholesale  prices, 
in  general,  are  more  sensitive  to  changes  and  fluctuate  more 
rapidly  and  more  violently  than  the  retail  price.  The 
theory  of  free  competition  holds  that  the  market  will  de- 
termine fair  prices  which  will  always  be  in  close  relation  to 
the  costs  of  production.  The  foundation,  therefore,  of 
every  price  system,  whether  wholesale  or  retail,  is  the  cost 
of  production.  Below  this  no  price  can  ever  go  for  a  long 
period  of  time.  Above  this  there  is  a  fair  field  for  com- 
petitive effort.  In  case  of  keen  competition,  the  general 
belief  has  been  that  prices  will  settle  close  to  costs  of  pro- 
duction, so  that  a  stable  system  will  be  developed. 

If  at  any  time,  however,  there  is  a  "run-away"  market, 
due  either  to  a  violent  change  in  production  or  in  consump- 
tion, the  system  tends  to  break  up.    "When  such  influences 


MERCHANDISING  COSTS  AND  PRICES  463 

reach  the  retail  market,  they  usually  come  with  accumu- 
lated violence.  Through  such  a  period  the  world  is  pass- 
ing at  the  present  time.  Until  conditions  both  in  the  field 
of  production  and  in  the  field  of  distribution  have  become 
sufficiently  stabilized  so  that  prices  can  become  reasonably 
regular,  it  will  not  be  possible  for  the  world  to  return  to 
normal  conditions.  In  other  words,  the  so-called  normal 
condition  of  business  is  a  stabilized  market  based  upon  a 
wholesale  and  retail  price  system. 

271.  Profits. — The  aim  of  all  business  activity  is  to 
realize  a  profit.  Practically  speaking  profits  appear  as  two 
different  kinds.  One  is  the  gross  profit  which  contains  the 
elements  of  expense,  and  the  other  is  the  net  profit  which 
is  considered  to  be  the  return  to  management.  Naturally 
the  gross  profit  is  much  larger  than  the  net  profit.  It 
has  been  estimated  that  the  net  profit  in  retail  business 
throughout  the  United  States  has  averaged  5  or  6  per  cent 
on  the  capital  invested.  This  margin,  however,  between 
costs  and  returns  marks  either  efficiency  of  management 
or  the  capitalization  of  unusual  profits. 

It  is  the  opportunity  for  making  a  profit  that  is  the 
great  directing  force  in  business  to-day.  It  must  be  re- 
membered that  men  do  what  pays  them  best  or  at  least 
what  they  think  will  pay  best.  The  number  of  manufac- 
turers, of  jobbers,  and  of  retailers  will  largely  be  deter- 
mined by  their  expectation  of  profits.  The  kind  of  indus- 
try in  which  the  manufacturer  will  engage,  the  kind  of 
goods  which  the  jobber  and  retailer  will  handle,  will  like- 
wise very  largely  be  determined  by  the  profit  opportunity. 

The  price  asked  for  commodities  is  one  which  is  set  for 
the  purpose  of  realizing  a  profit.  The  goods  made  by  the 
manufacturer  and  handled  by  the  jobber  and  retailer  must 
sell.  In  all  merchandising,  the  most  important  factor  is 
the  number  of  times  the  stock  of  goods  is  "turned."  Profit 
is  realized  on  units  of  commodities.    But  the  percentage  of 


464  MARKETING 

profit  is  determined  by  the  amount  of  capital  invested. 
Small  capital,  with  rapid  turnover  of  goods,  is  the  best 
means  of  securing  merchandising  success.  The  volume  of 
business  done  is  no  basis  for  judgment  until  the  amount  of 
capital  needed  and  the  number  of  times  the  stock  of  goods 
has  been  sold  out  are  determined. 

272.  One-Price  Policy. — One  striking  difference  between 
methods  of  retailing  in  the  United  States  and  those  abroad 
is  the  so-called  "one-price  policy."  This  policy  has  had  a 
rapid  development  in  this  country  and  has  been  found  so 
acceptable  to  the  consumer  that  most  retailers  have  been 
compelled  to  conform.  It  consists  in  offering  goods  at  a 
definite,  announced  price  at  which  any  consumer  may  pur- 
chase and  below  which  the  retailer  refuses  to  go.  Retail 
stores,  however,  that  maintain  a  one-price  policy  have  found 
it  necessary  to  hold  special  or  bargain  sales  in  order  to 
quicken  the  flow  of  goods  from  their  shelves. 

273.  List  Price. — One  method  of  announcing  the  price 
of  commodities  by  manufacturers  and  jobbers  is  somewhat 
inconsistent  with  the  one-price  policy  of  the  retailer.  This 
is  known  as  the  list-price  system.  An  announcement  is 
sent  to  the  retailer  by  the  manufacturer  or  the  jobber  stat- 
ing that  certain  goods  may  be  purchased  and  that  the  list 
price  is  so  much.  In  order  to  stimulate  cash  payment  and 
to  reduce  the  credit  risks  it  is  further  announced  that 
from  this  list  price  there  will  be  deducted  for  instance  60 
per  cent,  5  per  cent,  and  2  per  cent  for  cash  payment. 
These  stipulated  reductions  are  usually  a  part  of  the  list- 
price  system.  Special,  or  inside,  prices  are  sometimes  given 
in  connection  with  list  prices. 

274.  Discounts. — An  important  point  to  be  considered 
in  connection  with  all  prices  of  manufactured  goods  is  the 
possible  discount  which  may  be  obtained  by  prompt  pay- 
ment. The  credit  problem  is  always  a  difficult  one  and 
one  filled  with  great  risks.     In  order  to  reduce  it,  the 


MERCHANDISING  COSTS  AND  PRICES  465 

dealer,  manufacturer,  or  jobber  may  offer  certain  percent- 
ages of  discount  for  cash.  Discounts,  however,  may  be 
granted  for  other  causes.  There  are,  for  instance,  quan- 
tity discounts,  and  there  are  discounts  for  the  purpose  of 
securing  goodwill  from  those  who  buy  continuously  and  in 
considerable  quantities.  No  discount  can  be  given,  of  course, 
without  some  return.  Charges  are  constantly  running 
against  goods  from  the  moment  they  enter  the  manufactur- 
ing process  until  they  reach  the  consumer.  A  pertinent 
query  to  all  offers  of  discounts  is,  what  return  does  the 
giver  of  discount  receive  for  it? 

275.  Seasonal  Prices. — There  are  variations  in  the  prices 
of  merchandise  due  to  seasonal  demand.  In  most  com- 
modities, for  example,  the  price  level  rises  from  early 
autumn  to  the  beginning  of  the  holiday  season  at  Christ- 
mas. Then  follows  a  sharp  fall  in  prices,  so  that  January 
generally  marks  a  distinctly  low  ebb.  There  are  also  the 
spring  prices  and  the  fall  prices,  and  there  are  the  special 
summer  prices  for  the  purpose  of  stimulating  business  in 
dull  seasons.  Just  as  many  commodities  have  a  fluctuating 
supply,  so  they  have  a  fluctuating  demand.  There  will 
be  found  a  constant  tendency  for  the  price  level  to  move 
in  conformity  with  these  fluctuations. 

276.  Speculative  Prices. — In  the  roundabout  process  of 
to-day  there  is  much  buying  ahead  of  time  and  a  consequent 
speculative  element  in  business.  Future  buying  may  be 
done  in  either  of  two  ways :  there  may  be  a  price  definitely 
agreed  upon,  in  which  case  the  seller  takes  the  speculative 
risk ;  or  the  sale  may  be  made  with  the  condition  that  the 
buyer  will  pay  the  market  price  at  the  time  of  delivery. 
In  this  case,  the  buyer  takes  the  risk.  In  all  circumstances, 
however,  there  is  this  speculative  element  and  there  is  a 
price  margin  of  safety  in  future  buying. 

277.  Transportation  Charges. — Generally  speaking  the 
transportation  charge  on  manufactured  commodities  is  not 


466  MARKETING 

of  special  importance.  So  many  of  these  goods  move  in 
large  quantities  and  are  sold  on  the  basis  of  so  small  a  unit, 
that  the  actual  charge  for  transporting  to  be  allocated  to 
each  unit  is  practically  unimportant.  The  United  States, 
however,  is  a  large  country  and  the  transcontinental  rates 
usually  find  some  reflection  in  prices.  Many  public  an- 
nouncements, therefore,  contain  a  stipulated  price  for  the 
commodity,  adding  a  special  price  for  the  "Far  West"  or 
"West  of  the  Rocky  Mountains."  It  sometimes  happens 
that  this  addition  to  price  amounts  to  50  per  cent. 

Suggestions  fob  Study 

The  following  topics  will  be  found  useful  by  the  student 
in  his  study  in  connection  with  the  foregoing  chapter : 

General 

1.  The  annual  advertising  expenditure. 

2.  The  consumer  and  the  advertising  bill. 

3.  Non-advertisers  and  the  advertising  expenditure. 

4.  Production  costs  and  advertising. 

5.  Distribution  costs  and  advertising. 

6.  Prices  and  advertising  costs. 

7.  "There's  a  charge  for  store  rent  and  a  charge  for  adver- 
tising in  the  price  you  pay  for  every  pair  of  shoes." 

8.  "We  have  invested  approximately  $1,000,000  in  advertising 
and  missionary  work  to  get  the  proper  distribution,  but  not 
a  cent  of  that  was  ever  charged  to  the  goods  themselves." 

9.  "And  indeed  it  is  only  fair  that  this  cost  should  be  borne, 
in  the  last  analysis,  by  the  advertiser,  for  he  is  primarily 
responsible." 

How  Much  to  Spend  for  Advertising 

1.  Percentage  and  lump-sum  appropriations. 

2.  Advertising  as  an  investment  in  goodwill. 

3.  The  appropriation  problem  of  a  "going  concern." 


MERCHANDISING  COSTS  AND  PRICES  467 

4.  The  appropriation  problem  of  a  new  concern. 

5.  High  advertising  expenses  and  credits. 

6.  The  appropriation  as  related  to  the  kind  of  business. 

7.  The  problem  of  distributing  the  appropriation. 

8.  The  amount  to  be  spent  as  affected  by  the  purpose  in  view. 

Advertising   Costs 

1.  Space  cost  data  for  (a)  magazines,  (b)  newspapers,  (c) 
trade  and  technical  journals,  (d)  outdoor  advertising,  (e) 
street-car  advertising. 

2.  Agency  charges. 

3.  Cost  for  advertising  "service." 

4.  Standardizing  advertising  costs. 

5.  The  costs  of  guesswork. 

Readings  : 

Harvard  University,  Graduate  School  of  Business  Administra- 
tion Bulletins. 

Nystrom,  Economics  of  Retailing,  Chaps.  V,  VI. 

Printer's  Ink,  January  23,  1913,  p.  142;  December  9,  1915,  p. 
45;  June  3,  1915,  p.  53;  June  24,  1915,  pp.  73,  94;  December 
2,  1915,  p.  54;  February  4,  1915,  p.  98;  November  21,  1913; 
October  16,  1913;  September  9,  1915,  p.  24;  May  6,  1915, 
p.  8;  February  11,  1915,  p.  17;  February  18,  1915,  p.  78; 
March  14,  1915,  p.  6;  March  6,  1913;  January  9,  1913,  p. 
20;  January  16,  1913,  p.  10;  September  30,  1915,  p.  25. 

Richards,  Power  in  Advertising,  Chap.  XXIV. 

Richardson,  The  Power  of  Advertising,  Chap.  XLV. 

Hall,  Writing  an  Advertisement,  Chap.  XIV. 

Library  of  Business  Practice,  vol.  vi,  Chap.  XXIV. 

Cherington,  Advertising  as  a  Business  Force,  Chap.  XIII,  pp. 
429-460;  Chap.  X. 

,  Advertising  Book,  1916,  Chap.  IV. 

Chapman,  Law  of  Advertising  and  Sales,  vol.  ii,  p.  481. 

Advertising  and  Selling,  June  30.  1914,  p.  14;  April,  1914,  p. 
12. 


468  MARKETING 

De  Weese,  Practical  Publicity,  pp.  228-39. 

Efficiency  Magazine,  December,  1913. 

Calkins  and  Holden,  Modern  Advertising,  pp.  173-93,  200-19. 

Mahin,  Advertising  Data  Book,  pp.  26-110,  111-316,  330-331. 


CHAPTER  XXII 

MERCHANDISING  AND  SOCIAL  CONTROL 

278.  The  Forces  of  Social  Control. — The  consumer  has 
several  kinds  of  defense  in  the  bargaining  process.  His 
will  must  give  consent,  generally  speaking;  it  is  in  his 
power  to  buy  or  to  refuse  to  buy.  He  cannot  purchase 
beyond  his  ability  to  pay ;  his  purchasing  power  is  limited. 
Both  of  these  are  individual  considerations.  Society,  or 
consumers  as  a  group,  defend  themselves  by  various  kinds 
of  social  control;  they  enact  laws,  and  these  are  enforced 
by  the  police  power  and  interpreted  by  the  courts.  They 
develop  customs;  they  control  commercial  activity  by  con- 
certed action.    In  a  broad  sense,  the  "consumer  is  king." 

Business  is  carried  on  under  the  direction  of  social  con- 
trol. Law  has  been  denned  as  the  crystallization  of  the 
public  will.  However  imperfectly  that  will  is  registered, 
it  is  clear  that  commercial  law  is  the  result  of  an  attempt 
to  establish  principles  of  abstract  justice  in  business  deal- 
ings that  receive  the  sanction  of  the  collective  judgment 
of  men.  A  sale,  for  instance,  is  a  contract,  and  the  terms 
of  the  contract  are  enforced  by  the  collective  will  of  the 
people.  As  business  has  increased  in  complexity,  the  con- 
sumer's individual  ability  to  bargain  on  an  equal  basis  with 
the  merchant  has  grown  relatively  weaker.  The  effort 
to  restore  the  desired  equality  is  manifested  in  laws  and 
regulations. 

As  has  been  pointed  out  so  convincingly  in  that  epoch- 
making  book  by  the  late  W.  Gr.  Sumner,  Folkways,  there 

409 


470  MARKETING 

were  in  primitive  society  two  great  regulative  forces,  one 
positive,  the  other  negative.  Tradition  determined  what 
was  the  right  thing  to  do;  "taboos"  determined  what  was 
not  to  be  done.  In  modern  society,  also,  there  are  two 
forces  at  work  for  social  control,  the  ethical  and  the  politi- 
cal. The  former  arises  from  sentiment,  the  latter  from 
careful  consideration  and  deliberate  device.  Both  of  these 
affect  human  conduct,  in  business  as  elsewhere.  Instances 
of  both  kinds  of  control  will  be  considered  briefly  for  the 
purpose  of  showing  that  trade  operates  freely  only  under 
the  rules  established  by  social  control. 

279.  Enforced  Competition. — The  will  of  the  people  has 
registered  itself  in  laws  to  compel  business  men  to  compete 
with  one  another.  One  instance  of  such  law  is  found  in 
the  Interstate  Commerce  Act  of  1887,  and  another  is  the 
Sherman  Anti-Trust  Law  of  1890.  It  is  unlawful  for  busi- 
ness men  to  combine  in  restraint  of  trade.  In  general,  busi- 
ness must  be  carried  on  under  enforced  competition.  This 
applies  to  merchants  as  well  as  to  manufacturers. 

Modifications,  however,  have  been  made  to  this  sweeping 
regulation.  By  the  Clayton  Act  of  1914,  workmen  and 
farmers  were  exempted  from  its  provisions.  Concerted 
action  by  these  two  groups  is  not  unlawful.  A  further 
modification  has  been  made  by  the  interpretation  of  the 
law  by  the  Supreme  Court  in  the  cases  of  the  American 
Tobacco  Company  and  others,  where  the  "rule  of  reason" 
has  been  applied.  Further  limitations  were  placed  upon 
the  application  of  the  law  by  the  passage  in  April,  1918, 
of  the  Webb  Bill,  which  makes  it  legal  to  combine  for  ex- 
port trade. 

These  enactments  show  clearly  that  the  popular  mind 
changes  from  time  to  time  on  such  complex  problems  as 
competition  offers.  Nevertheless,  the  individual  business 
man  must  obey  the  popular  will  as  it  finds  expression.  The 
entire  concept  of  this  subject  is  to-day  doubtless  undergoing 


MERCHANDISING  AND  SOCIAL  CONTROL        471 

a  change,  more  or  less  radical,  and  the  business  policies 
wisely  and  farsightedly  directed  will  mark  these  changes 
and  adjust  themselves  accordingly. 

280.  Protecting  Standards. — One  way  in  which  business 
makes  progress  is  by  raising  the  standards  of  quality.  Not 
only  must  goods  be  what  they  are  declared  to  be,  but  they 
must  not  contain  adulterants.  The  will  of  the  people  de- 
clared this  in  the  Pure  Food  and  Drug  Act  of  1906.  The 
foisting  of  patent  medicines  with  unknown  content  upon 
an  ignorant  public  is  no  longer  permitted.  The  contents 
must  be  clearly  and  conspicuously  printed  on  the  bottle 
or  package.  Under  stress  of  war  some  commodities  have 
deteriorated,  and  there  will  be  needed  a  painful  struggle 
to  regain  lost  ground.  But  it  will  be  done,  and  progress 
will  continue. 

With  the  advent  of  package  goods,  where  inspection  is 
no  longer  possible,  the  need  for  further  protection  of  stand- 
ards is  felt.  The  deviation  from  standard  may  be  either 
in  quantity  or  in  quality.  Net  weight  of  contents  must  be 
stated,  and  the  merchant  is  penalized  for  any  kind  of 
falsification.  There  is  a  similar  control  over  quality.  Busi- 
ness ethics  of  to-day  demands  that  business  men  shall  prac- 
tice the  "all-wool-and-a-yard-wide"  principle. 

It  is  obvious  that  long-range  business  requires  the  en- 
forcement of  standards.  A  few  dishonest  men,  against 
whom  there  is  no  protection,  would  be  able  to  demoralize 
business.  The  will  of  society  has  therefore  declared  that 
what  the  majority  desire  shall  be  the  rule  for  all.  Break- 
ing away  from  standards  in  order  to  deceive  is  "taboo." 

The  principle  holds  for  measure  as  well  as  for  weight 
and  quality.  False  bottoms  in  containers  are  illegal.  It  is 
still  permissible,  and  all  too  frequently  practiced,  to  con- 
struct a  deceptive  container ;  it  is  made  to  look  larger  than 
it  really  is.  Thus  bottles  have  hollow  bottoms  and  boxes 
have  edges  extending  beyond  the  bottoms.    Business  men 


472  MARKETING 

who  practice  these  deceptions  are  obeying  the  letter  of  the 
law  only.  In  time  they  will  not  be  allowed  such  petty 
deceits. 

281.  Protecting  Rights. — Society,  through  the  enactment 
of  laws,  protects  individual  rights.  This  fact  is  illustrated 
in  all  forms  of  property  rights  of  individuals  and  corpora- 
tions. It  enters  also  into  all  kinds  of  trade  relationships, 
not  only  by  enforcing  contracts  of  sale  but  also  in  pro- 
tecting patent  rights,  copyrights,  and  goodwill. 

The  very  definition  of  a  patent  shows  the  motive  behind 
the  social  control  of  patent  rights.  A  patent  right  gives 
to  the  owner  the  exclusive  privilege  of  making,  using,  and 
vending  any  new  and  useful  art,  machine,  manufacture,  or 
composition  of  matter.  It  is  society's  method  of  encourag- 
ing inventive  genius ;  it  guarantees  to  the  inventor  the  sole 
right  to  the  results  of  his  ability,  in  so  far  as  he  can  make 
it  effective.  Patents,  along  with  all  of  their  rights,  can 
be  bought  and  sold  in  the  market,  but  these  rights  are  vested 
in  the  inventor  until  he  willingly  gives  them  up.  And  for 
a  further  assurance  that  society  itself  may  benefit  by  the 
invention,  the  law  sets  a  limit  to  the  length  of  time  that 
a  patent  can  run. 

Similarly,  a  copyright  gives  exclusive  right  to  multiply 
copies  of  a  published  intellectual  work.  This  right  is  read- 
ily secured  by  the  author  or  publisher  by  the  payment  of  a 
nominal  fee  of  one  dollar  and  by  depositing  two  copies  in 
the  Congressional  Library.  In  this  way  society  seeks  the 
general  benefit  of  intellectual  ability. 

As  affecting  trade  more  directly  there  are  the  protective 
rights  pertaining  to  trade-marks.  While  patent  rights  and 
copyrights  are  statutory,  trade-mark  rights  are  those  of 
common  law.  The  one  essential  for  acquiring  these  rights 
is  "priority  of  adoption,  coupled  with  actual  use  upon 
goods  in  the  market."  The  goods  to  which  they  are  at- 
tached must  be  saleable  and  on  sale  in  the  market.    "In 


MERCHANDISING  AND  SOCIAL  CONTROL        473 

general,  any  merchant,  manufacturer,  dealer,  or  any  one 
who  is  a  trader,  or  conducts  a  commercial  establishment, 
hotel,  newspaper,  or  magazine,  may  identify  his  product 
or  business  by  any  lawful  mark  and  be  protected  against 
infringement. ' ' l 

In  connection  with  the  protective  rights  pertaining  to 
trade-marks  and  trade  names,  there  is  the  question  of  good- 
will. The  fundamental  principle  to  which  social  will  has 
been  reduced  is  thus  simply  stated:  "No  one  has  any  right 
to  sell  his  goods  as  the  goods  of  another."  Goodwill,  pro- 
tected in  this  way,  is  considered  as  a  tangible,  substantial 
thing,  resulting  from  the  offering  by  the  business  man  of 
a  distinctive  mark,  quality,  or  service.  It  is  to  encourage 
honorable  and  fair  dealing,  the  handling  of  wares  of  the 
highest  quality,  and  any  form  of  service  for  the  custom- 
er's complete  satisfaction  that  society  has  laid  down  this 
simple  principle. 

282.  Enforcing  Honesty. — Because  evil  practice  by  a 
few  may  discredit  the  many,  society  has  demanded  laws 
to  punish  the  dishonest  ones.  More  and  more,  society  is 
trying  to  enforce  honesty  upon  every  business  man ;  hon- 
esty in  dealings  with  the  consumer  and  with  other  business 
men.  This  desire  underlies  the  laws  to  regulate  advertis- 
ing. 

There  are,  in  general,  three  types  of  laws  in  force  for  pro- 
tecting the  public  against  dishonest  advertising  and  false 
pretenses  in  merchandising.  One  is  the  so-called  "model 
statute,"  which  is  now  a  law  in  eight  or  more  states,  and 
reads  as  follows: 

Any  person,  firm,  corporation,  or  association  who,  with  intent 
to  sell  or  in  any  way  dispose  of  merchandise,  securities,  service, 
or  anything  offered  by  such  person,  firm,  corporation,  or  asso- 
ciation, directly  or  indirectly,  to  the  public  for  sale  or  distribu- 

1  E.  S.  Rogers,  Outline  of  Law  of  Trade-Marks. 


474  MARKETING 

tion,  or  with  intent  to  increase  the  consumption  thereof,  or  to 
induce  the  public  in  any  manner  to  enter  into  any  obligations 
relating  thereto,  or  to  acquire  title  thereto,  or  an  interest  therein, 
makes,  publishes,  disseminates,  circulates,  or  places  before  the 
public,  or  causes,  directly  or  indirectly,  to  be  made,  published, 
disseminated,  circulated,  or  placed  before  the  public,  in  this 
State,  in  a  newspaper  or  other  publication,  or  in  the  form  of  a 
book,  notice,  handbill,  poster,  bill,  circular,  pamphlet,  or  letter, 
or  in  any  other  way,  an  advertisement  of  any  sort  regarding 
merchandise,  securities,  service,  or  anything  so  offered  to  the 
public,  which  advertisement  contains  any  assertion,  representa- 
tion, or  statement  of  fact  which  is  untrue,  deceptive,  or  mis- 
leading, shall  be  guilty  of  misdemeanor. 

There  is  another  law  very  similar  to  this,  but  amended 
by  the  insertion  of  the  word  "knowingly"  or  some  such 
term,  before  "makes,  publishes,  disseminates,  etc."  This 
insertion  definitely  places  the  burden  of  proof  on  the  prose- 
cution. It  must  be  demonstrated  that  the  advertiser  knew 
what  was  said  was  false  and  intended  to  deceive.  To  prove 
motive  is  never  easy. 

A  third  type  of  law,  following  the  Massachusetts  enact- 
ment, penalizes  the  advertiser  for  a  false  statement  of  fact 
about  his  merchandise.  An  Illinois  Act  "to  prevent  frau- 
dulent advertising,"  approved  June  19,  1915,  runs  thus, 
the  italics  being  the  author's: 

Section  1.  Be  it  enacted,  etc.,  that  whosoever,  being  any 
person,  firm,  corporation  or  association,  in  a  newspaper,  period- 
ical, circular,  form,  letter,  or  other  publication,  published,  dis- 
tributed, or  circulated  in  this  commonwealth  in  any  advertise- 
ment in  this  commonwealth,  knowingly  makes  or  disseminates, 
or  causes  to  be  made  or  disseminated,  any  statement  or  assertion 
concerning  the  quantity,  and  the  quality,  the  value,  the  merit, 
the  ability,  the  use,  the  present  or  former  price,  the  cost,  the 
reason  for  the  price,  or  the  motive  or  purpose  of  a  sale,  of  any 
merchandise,  securities,  service,  or  anything  of  value;  or  con- 
cerning the  method  or  cost  of  production  or  manufacture  of  such 


MERCHANDISING  AND  SOCIAL  CONTROL        475 

merchandise;  or  the  possession  of  rewards,  prizes,  or  distinctions 
conferred  on  account  of  such  merchandise,  securities,  services,  or 
anything  of  value;  or  the  manner  or  source  of  purchase  of  such 
merchandise  or  securities,  or  thing  of  value  with  intent  to  sell 
or  in  any  wise  dispose  of  such  merchandise,  securities,  or  thing 
of  value;  which  is  untrue  or  calculated  to  mislead  and  know  to  be 
so  by  said  person  at  said  time,  shall  be  guilty  of  a  misdemeanor, 
and  on  conviction  be  sentenced  to  pay  a  fine  of  not  more  than 
one  thousand  dollars,  or  by  imprisonment,  in  the  county  jail 
not  exceeding  60  days,  or  by  both  such  fine  and  imprisonment. 

283.  Price  Control. — In  a  time  of  emergency,  when  so- 
ciety itself  is  in  danger,  private  interest  must  yield  to  pub- 
lic interest.  This  fact  was  demonstrated  during  the  world 
war,  in  the  United  States  us  well  as  elsewhere.  Among 
other  ways  it  found  expression  in  price  regulation  and 
control.  Beginning  in  August,  1917,  the  government  price 
control  extended  to  the  signing  of  the  armistice  in  No- 
vember, 1918.  Although  control  at  this  latter  period  was 
greatly  relaxed,  there  was  still  regulation  affecting  trade, 
as  in  sugar,  wheat,  and  flour. 

Necessity  from  a  social  point  of  view  dictated  the  exten- 
sion of  governmental  power  over  prices.  From  1896  on 
there  had  been  a  continued  rise  in  price  level.  The  high 
cost  of  living  was  a  common  topic  of  discussion  before  1914. 
With  the  opening  of  the  war,  there  were  new  increases 
and  more  widespread  unrest.  After  the  United  States  en- 
tered the  war  there  was  another  rapid  rise.  The  cry  of 
profiteering  was  begun.  Some  curb  on  private  greed  was 
demanded.  The  answer  to  this  demand  was  governmental 
control. 

It  was  a  new  venture  for  our  government,  and  therefore 
no  precedent  had  been  set.  Knowledge  of  even  the  fun- 
damental facts  was  lacking.  In  consequence,  many  mis- 
takes were  made.  In  some  cases  the  price  of  the  finished 
product  was  fixed,  but  not  the  price  of  raw  materials. 


476  MARKETING 

Other  instances  showed  miscalculations.  Yet,  crude  as  the 
methods  were  and  mistaken  as  the  judgment  was,  the  entire 
experiment  illustrates  the  use  of  social  control  in  busi- 
ness. 

284.  Public  Utilities. — The  recognition  of  social  control 
behind  business  activities  is  further  demonstrated  in  the 
case  of  public  utilities.  These  enterprises  have  been  de- 
fined as  "private  property  devoted  to  public  service." 
They  comprise  those  types  of  business  which  have  been  de- 
clared of  so  much  concern  to  society  as  a  whole,  so  inti- 
mately connected  with  general  welfare,  that  everything  that 
affects  them  is  of  public  interest.  As  a  result,  railroads, 
street  railways,  water  plants,  gas,  electric  light,  ware- 
houses, pipelines,  have  been  set  apart  from  all  other  busi- 
ness and  required  to  operate  under  special  regulation  and 
supervision.  Banks  may  be  called  semi-public  businesses; 
and  likewise  insurance  companies.  These,  too,  have  special 
regulations. 

There  is  no  clear  line  of  division  between  public  utili- 
ties and  many  businesses  of  vital  importance  to  the  public. 
The  tendency  appears  to  be,  at  present,  to  extend  the  list. 
Carried  to  an  extremity  this  movement  arrives  at  a  sociali- 
zation of  industry.  Of  this  type  of  social  control,  coopera- 
tive enterprises  are  illustrative.  Collective  management  by 
a  group  is  the  direct  operation  of  social  control. 

285.  Methods  of  Control. — There  are  numerous  methods 
by  means  of  which  social  control  may  declare  itself.  Some 
of  these  are  organized  methods;  many  are  not.  Public 
interest  manifests  itself  often  in  unexpected  ways.  Several 
of  the  most  important  ones  are  suggested  below. 

286.  1.  By  Enacting  Laws. — Through  the  various  po- 
litical organizations  the  social  will  may  declare  itself.  Fed- 
eral, state,  and  municipal  laws  prohibit  directly  certain 
business  activities.  Liquor  and  opium  traffic  has  thus  been 
prohibited.    Such  laws  may  not  only  prohibit,  but  may  also 


MERCHANDISING  AND  SOCIAL  CONTROL'        477 

command  or  permit  the  doing  of  certain  things  in  a  cer- 
tain way.  Under  all  of  them,  prohibitive,  mandatory,  or 
permissive  business  must  operate. 

287.  2.  By  Licenses  or  Examinations. — Individuals 
may  be  prevented  from  engaging  in  business  and  the  busi- 
ness itself  may  not  be  permitted  to  operate  unless  certain 
licenses  have  been  issued.  All  professions  require  exami- 
nation of  those  who  would  enter.  Licenses  must  be  held 
by  druggists,  barbers,  engineers,  chauffeurs,  and  others. 
It  has  even  been  suggested  that  retailers  of  all  types  should 
be  required  to  hold  licenses.  The  requirement  of  examina- 
tions and  licenses  is  society's  method  of  defending  itself 
against  ignorance  and  incompetence.  If  this  method  is 
recognized  to  be  working  poorly,  other  and  more  effective 
means  will  be  devised.  It  is  the  social  will  that  business  be 
done  more  and  more  efficiently. 

288.  3.  By  Taxation. — Governmental  power  of  taxation 
is  sometimes  invoked  to  control  business  activity.  In  part 
this  may  be  a  method  of  discouragement,  by  handicapping 
the  individual  or  his  business.  Or  the  burden  of  taxation 
may  be  made  so  heavy  as  to  act  as  a  positive  prohibition 
from  engaging  in  a  particular  business. 

This  method  is  well  illustrated  in  the  case  of  trading- 
stamp  companies.  There  are  several  states  that  have  im- 
posed such  heavy  taxes,  not  only  on  the  companies  issuing 
the  stamps  or  coupons  but  also  upon  every  retailer  who 
uses  them,  as  to  make  it  impossible  to  carry  on  the  busi- 
ness. In  the  State  of  Washington,  for  example,  there  is  a 
law  that  imposes  a  license  tax  of  $6,000  annually  upon  every 
company  .that  sells  stamps  to  retailers  and  upon  each  mer- 
chant who  uses  them.  In  Florida,  there  is  a  law  requiring 
the  payment  of  an  annual  tax  of  $500  to  the  state  and  an- 
other of  $250  in  each  county  where  business  is  done.  Ob- 
viously, the  purpose  of  such  taxation  is  to  prohibit,  not  to 
regulate. 


478  MARKETING 

289.  4.  By  Force  of  Example. — A  type  of  unorganized 
control  that  finds  expression  by  force  of  example  is  illus- 
trated by  the  introduction  into  retail  business  of  the  one- 
price  policy.  Credit  for  introducing  this  policy  is  given 
to  John  Wanamaker,  when  he  began  his  retail  experience 
in  Philadelphia.  "Whether  or  not  this  is  historically  true, 
he  has  consistently  practiced  it.  Other  leading  merchants 
adopted  the  policy  also,  and  the  consuming  public  was 
pleased  with  it.  So  effective  did  the  policy  prove  that  the 
majority  of  retail  merchants  were  forced  into  line,  and  to- 
day the  old-fashioned,  crude  higgling  over  prices  is  no 
longer  considered  good  business  practice.  This  is  the  an- 
cient principle  of  a  little  leaven  affecting  the  whole  lump. 
It  shows,  too,  that  the  popular  endorsement  of  an  exam- 
ple is  a  powerful  means  for  control.  A  single  individual 
or  a  small  group  may  stand  as  the  public's  expression  of 
a  standard  to  which  all  others  must  measure  up. 

Another  example  of  the  working  of  this  principle  is 
found  in  the  adoption  of  a  standard  closing  time.  In  many 
instances,  to  be  sure,  a  municipal  ordinance  embodies  the 
popular  will.  But  in  a  multitude  of  other  cases,  the  open- 
ing and  closing  hours  are  "adopted  by  common  consent." 
This  illustrates  the  unorganized  force  of  example. 

A  different  phase  of  this  same  power  of  control  is  to  be 
found  in  the  censorship  of  advertisements.  There  are  cer- 
tain magazines,  for  example,  that  refuse  copy  which  does 
not  meet  their  standards  of  business  ethics.  This  policy, 
also,  has  received  popular  approval,  so  that  the  columns 
of  those  periodicals  have  unusual  advertising  power.  Busi- 
ness men  are  glad  to  trim  their  policies  in  order  to  secure 
entrance  into  these  advertising  media.  Herein  lies  a 
power  for  control. 

290.  5.  By  Group  Action. — Social  control  may  be 
exerted  through  group  action  among  business  men  them- 
selves.   Examples  of  this  fact  are  found  in  trade  associa- 


MERCHANDISING  AND  SOCIAL  CONTROL        479 

tions.  Members  of  these  associations  are  made  to  feel  the 
disfavor  of  their  fellows  when  their  practices  are  below 
standard.  The  effect  is  a  powerful  one.  Control  in  such 
organizations  may  go  so  far  as  to  find  expression  in  various 
kinds  of  discipline. 

A  specific  instance  of  this  method  of  control  is  to  be 
found  in  the  Associated  Advertising  Clubs,  where  a  vigi- 
lance committee  was  organized  for  the  purpose  of  improv- 
ing advertising  practice.  Cases  of  bad  practice  were 
watched  for,  and  the  business  men  who  were  guilty  of 
such  were  interviewed,  and  even  prosecuted,  if  the  prac- 
tices were  illegal  and  were  persistently  carried  out. 

291.  6.  By  Publicity. — As  sunlight  is  fatal  to  many  un- 
desirable germs,  so  the  light  of  public  knowledge  is  destruc- 
tive to  bad  business  practices.  What  men  will  do  in  secret 
is  often  far  different  from  what  they  will  do  in  the  open. 
Open  transactions  openly  arrived  at  are  as  much  to  be 
desired  in  home  trade  as  in  international  diplomacy.  It  is 
for  these  reasons  that  publicity  is  a  powerful  force  in  di- 
recting and  controlling  business  policies.  Thus,  published 
annual  statements  are  required  of  many  business  concerns. 
Newspapers,  too,  must  publish  the  facts  about  ownership 
and  management  of  their  columns,  and  furnish  accurate 
data  on  circulation. 

Because  the  public  may  suspect  those  methods  that  are 
kept  secret,  many  managers  have  learned  to  take  advan- 
tage of  this  desired  publicity.  There  are  manufacturers 
and  merchants  who  make  a  business  of  keeping  "open 
house."  They  advertise  the  fact  that  they  have  nothing 
to  conceal.  Stock  exchanges  often  take  great  pains  to  make, 
clear  to  the  layman  those  peculiar  methods  which  they  em- 
ploy. But  too  much  business  is  still  done  secretively.  Still, 
more  and  more  the  open  door  policy  is  gaining  ground. 
Publicity  will  become  a  greater  and  greater  power  in  toning 
up  business  practice. 


4S0  MARKETING 

292.  7.  By  Limiting  Profits. — Business  is  oftentimes 
badly  shaken  by  sudden  droughts,  blights,  storms,  and 
other  disasters.  While  trade  is  thus  off  center,  some  men 
may  find  themselves  in. strategic  positions  where  it  is  pos- 
sible to  take  advantage  of  other  business  men  and  of  the 
public. 

The  social  will  does  not  permit  an  extortionate  interest 
rate  for  money  loaned.  Occasionally,  too,  the  profits  al- 
lowed are  definitely  controlled.  Men  conduct  business  to 
make  money,  but  society  will  not  permit  unbridled  greed. 
This  is  called  "profiteering,"  and  is  socially  condemned. 
If  the  public  disapproval  is  not  enough  to  stop  the  practice, 
laws  will  be  demanded  to  regulate  and  control  the  net 
returns. 

293.  8.  By  Boycotting. — Another  powerful  force  to 
control  trade  rests  with  the  consumers.  They  can  refuse 
to  buy  certain  commodities  or  decide  to  buy  only  in  small 
Quantities.  During  the  war,  there  were  meatless  days, 
heatless  days,  gasoline-less  days.  There  was  refusal  to  buy 
extra  clothing  or  luxuries.  In  the  period  of  high  prices 
following  the  war,  there  came  into  existence  old-clothes 
clubs,  overall  clubs,  anti-luxury  clubs,  and  so  on.  The 
Canners'  Association  at  a  convention  passed  resolutions 
to  boycott  the  sugar  dealers. 

Although  the  consumers  are  unorganized  and  make  often 
abortive  efforts  to  accomplish  their  desired  results,  their 
influence  on  the  whole  is  fairly  effective.  "The  consumer 
is  king." 

294.  9.  By  "Suggesting"  Prices. — In  connection  with 
the  power  of  publicity,  there  should  be  considered  the  ex- 
perience during  the  war  of  publishing  a  list  of  ' '  fair  prices ' ' 
as  a  suggestion  to  dealers  and  consumers.  This  method 
had  a  powerful  effect  in  determining  prices.  Coming  as 
the  suggestions  usually  did  from  an  official  body,  even 
though  that  body  had  no  authority  to  fix  prices  or  to  punish 


MERCHANDISING  AND  SOCIAL  CONTROL        481 

those  who  refused  to  regard  the  suggestions,  they  never- 
theless smacked  of  official  sanction. 

Some  powerful,  private  organizations  have  used  this 
method  in  the  past  to  control  retail  prices.  Lists  of  sug- 
gested prices  were  given  to  the  retail  dealers,  and  the  ac- 
tivities of  these  dealers  were  watched.  If  the  suggested 
prices  were  disregarded,  there  were  means  at  hand  to 
discipline  them. 

295.  Machinery  for  Control. — There  are  two  types  of 
machinery  through  which  social  control  can  function :  gov- 
ernmental machinery  and  private  machinery. 

296.  1.  Governmental  Machinery. — There  are  also  two 
general  kinds  of  governmental  machinery :  that  devised  for 
continued  operation,  and  that  created  for  emergency  pur- 
poses. Of  the  continuous  type  there  are  the  agencies  de- 
scribed below. 

The  Interstate  Commerce  Commission  was  organized  in 
1887  to  supervise  railroad  operation  and  establish  maximum 
and  minimum  rates.  The  roads,  at  the  time  of  its  forma- 
tion, were  engaged  in  a  rate  war,  and  by  means  of  cut- 
throat competition  were  destroying  one  another.  Rebates 
and  other  unfair  practices  were  rife.  The  commission  is 
the  public's  representative  to  oversee  the  conduct  of  the 
transportation  system. 

The  Federal  Trade  Commission  came  into  being  in  1914 
for  the  purpose,  primarily,  of  stopping  methods  of  unfair 
competition.  It  was  also  intended  by  those  who  originated 
the  idea  that  this  Commission  would  become  a  great  clear- 
ing house  of  trade  information,  and  so  be  a  powerful  di- 
rective business  force.  Its  activities,  for  the  most  part, 
have  been  investigatory,  and  the  results  of  the  investiga- 
tions have  largely  been  made  public.  Sometimes  the  De- 
partment of  Justice  has  acted  upon  their  recommendations 
and  instituted  proceedings  against  corporations. 

There  also  was  established  a  government  body  to  su- 


482  MARKETING 

pervise  the  foreign-trade  interests  of  the  American  mer- 
chants and  especially  to  develop  a  merchant  marine.  This 
is  the  United  States  Shipping  Board.  This  board  is  granted 
power  to  own,  operate,  and  control  ships  and  to  enter  into 
competition  with  the  domestic  and  the  foreign  shipping  in- 
terests. Like  the  Federal  Trade  Commission,  it  can  inves- 
tigate and  suggest  changes  in  management  and  methods. 
Like  the  Interstate  Commerce  Commission,  it  can  deal  in 
an  advisory  way  with  freight  rates.  By  means  of  its  an- 
nounced rates,  it  has  been  able  to  stabilize  and,  to  a  certain 
extent,  settle  the  uncertainty  of  the  rate  schedules  during 
the  recent  past. 

Another  government  department  having  to  do  with  the 
general  control  of  business  is  the  Department  of  Com- 
merce. This  Department  especially  through  the  Bureau* 
of  Foreign  and  Domestic  Commerce,  acts  in  an  advisory 
capacity  for  business  men  who  desire  to  develop  foreign 
trade.  It  makes  special  investigations  and  it  furnishes 
information  of  value  to  business  men.  Its  power  is,  there- 
fore, directive  rather  than  one  of  control. 

For  the  enforcement  of  law,  the  government  has  its  De- 
partment of  Justice.  This  Department  in  charge  of  the 
Attorney-General  aims  to  enforce  the  laws  that  have  been 
passed  by  the  Federal  Congress.  It  is,  therefore,  essentially 
a  mechanism  for  control.  In  so  far  as  its  activities  touch 
business  relations,  the  social  control  is  applied  to  business. 

In  addition  to  the  continuous  peace-time  organizations 
described  above,  there  have  been  organized  several  emer- 
gency boards  for  the  purpose  of  directing  and  regulating 
business  activity  during  the  war.  One  of  the  most  im- 
portant of  these  boards  from  the  point  of  view  of  the  busi- 
ness man  was  the  War  Trade  Board.  This  body  had  gen- 
eral charge  of  exports  and  imports  and,  through  a  system 
of  licenses,  controlled  with  a  firm  hand  the  character  and 
amount  of  commodities  to  be  brought  into  the  country  and 


MERCHANDISING  AND  SOCIAL  CONTROL        483 

to  be  shipped  abroad.  With  the  passing  of  the  war,  this 
Board  went  out  of  existence. 

For  dealing  with  domestic  trade,  there  was  created  the 
War  Industries  Board.  This  body  dealt  with  the  problems 
of  raw  materials  and  manufactured  goods,  particularly  in 
those  cases  where  priority  rights  were  necessary.  The 
Board  determined  to  what  kind  of  industry  materials  should 
first  be  furnished,  and  suggested  modifications  in  the  manu- 
facturing plans  of  non-essential  goods.  Like  the  War 
Trade  Board,  this  organization  went  out  of  existence  after 
the  signing  of  the  armistice. 

Under  the  stress  of  the  war,  the  railroads  and  the  tele- 
phone and  telegraph  systems  of  the  country  passed  under 
government  control  and  operation.  The  Railroad  Adminis- 
tration was  put  in  charge  of  all  the  railroads  and  was  di- 
rectly responsible  for  their  conduct.  The  Postmaster-Gen- 
eral was  in  control  of  the  telephone  and  telegraph  systems. 
This  illustrates  the  fact  that  when  society  is  in  danger,  pri- 
vate interests  are  disregarded  in  favor  of  social  interests. 

Other  bodies  such  as  the  Food  Administration  and  the 
Fuel  Administration  were  organized  to  defend  the  public 
against  profiteering  and  to  direct  for  the  common  interest 
these  essential  industries.  Like  the  other  emergency  boards, 
they  passed  out  of  existence  when  the  war  was  ended.  As 
an  after-effect  of  the  war,  there  has  come  into  existence 
such  an  organization  for  social  control  as  the  Massachu- 
setts Commission  on  the  Necessaries  of  Life.  This  body 
makes  investigations  into  the  cost  of  living  and  by  pub- 
licity attempts  to  determine  a  fair  method  of  carrying  on 
business.  The  results  of  the  investigations  by  this  Com- 
mission, becoming  known  to  the  entire  public,  enable  them 
to  defend  themselves  against  exorbitant  charges.  It  is, 
however,  only  a  temporary  expediency. 

297.  2.  Private  Machinery. — In  contrast  with  the  gov- 
ernment organizations  are  those  that  have  been  established 


484  MARKETING 

by  business  men  themselves.  The  most  powerful  of  these  are 
the  trade  associations.  There  are  more  than  3,000  of  these 
associations  in  the  United  States  to-day,  and  practically 
all  are  aggressively  active. 

They  are  usually  based  upon  a  community  of  interest, 
and  are  confined  in  membership  to  certain  lines  of  indus- 
try or  trade.  There  are  numerous  retail  associations,  job- 
bers' associations,  and  wholesalers'  associations.  There 
are  credit  men's  associations,  bankers'  associations,  and 
manufacturers'  associations.  All  of  these  bodies  afford  an 
educational  and  a  directive  force  in  business.  Through 
the  discussion  of  common  problems  they  often  resolve  on 
collective  action  to  which  the  individual  must  conform. 

So  powerful  have  these  agencies  become  in  standardizing 
business  methods  and  particularly  in  leveling  out  prices 
and  reducing  the  field  of  competition,  that  there  has  come 
a  reaction  against  them.  It  is  felt  by  many  that  the  trade 
associations  accomplish  the  results  which  have  been  denied 
to  combinations  and  monopolies  by  the  law.  If  this  com- 
plication occurs,  there  will  be  sooner  or  later  restrictive 
legislation  to  reestablish  free  and  individual  competition. 

298.  Conclusion. — The  social  control  of  business, 
therefore,  is  a  strong  directive  force  and  has  found  ex- 
pression in  many  different  ways.  If  carried  to  extremes, 
the  principle  of  social  control  will  result  inevitably  in  some 
kind  of  Soviet  system.  If  the  principle  of  socialization  of 
industry  which  has  been  applied  in  many  countries  to  es- 
sential industries  is  broadened  in  scope,  there  will  be  a  fur- 
ther restriction  of  individual  enterprise.  It  is  only  under 
a  system  of  laissez-faire  that  the  individual  is  compara- 
tively free  from  restrictive  social  control.  As  business 
philosophy  changes  in  regard  to  business  principles,  the 
controlling  force  naturally  will  change. 


MERCHANDISING  AND  SOCIAL  CONTROL        485 

Suggestions  for  Study 

The  student  should  now  consider  the  elements  of  social 
control  in  marketing  the  commodity  which  he  has  under  in- 
vestigation. Classroom  work  may  consist  of  discussion  of 
the  following  topics: 

1.  Consumer  defenses. 

2.  Economic  aspects  of  social  control. 

3.  Growing  recognition  of  social  control. 

4.  Social  service  aspects  of  merchandising. 

5.  Marketing  problems  under  a  socialistic  regime. 

G.  Changing  ethical  requirements  of  business  policies. 

7.  Business  freedom  under  the  law. 

8.  Historical   development  of  business   standards. 

9.  Experience  with  price  control. 

10.     Government  ownership  and  operation  of  business  enter- 
prise. 

Readings  : 

Sumner,  Folkways. 

Ross,  Social  Control. 

Political  Science  Quarterly,  vol.  xxv,  pp.  520-33. 

Ghent,  Our  Benevolent  Feudalism. 

Parsons,  Legal  Doctrine  and  Social  Progress. 

Bonar,  Philosophy  and  Political  Economy,  p.  130. 

McKechnie,  The  State  and  the  Individual. 

Willoughby,  Government  Organization  in  War  Time  and  After. 

Palgrave,  Dictionary  of  Political  Economy,  vol.  ii,  p.  242. 

Atlantic  Monthly,  vol.  cxiv,  "The  Rain  of  Law." 

Publications  of  American  Economic  Association   vol.  i,  p.  513. 


INDEX 


Acceptance,  trade,  268-70 
Adams,    Marketing    Perishable 

Farm  Products,  229 
Advertising,  427-9 
agency,  417-19 
appropriation,  452 
commodity     characteristics 

and,  429-30 
censorship,  478-9 
Clubs,  Associated,  479 
department,  413-17 
economics        of,        426-47 

(Chap,  xx ) 
identification  of  commodity 

and,  387-99 
laws,  473-5 
manager,  416-17 
market  characteristics  and, 

430-32 
media,  426-7;  selection  of, 
385-7,     432-3 ;     business 
letters,   438 ;    catalogues, 
442-3 ;  dealer  helps,  443 ; 
demonstrators,        443-4 ; 
house      organs,      437-8; 
magazines,  435-7;  news- 
papers,   433-5;    outdoor, 
439;  street  car,  439-41; 
window  displays,  441-2 
returns,  checking,  444 
space,  buying,  455-6 
who  pays  for,  453-5 
Agencies,  distributive,  choosing, 
330-32 


Agency,  advertising,  417-19 

Agent,  commission,  328 
manufacturer's,  328-9 
purchasing,  289 

Agricultural  implements,  trade 
organization,  335-6 

Agriculture,  U.  S.  Department 
of,  bureaus  of,  210-11; 
see  also  International 
Agricultural  Institute 

Aluminum,  market  center,  47 

Analysis,  of  commercial  prob- 
lems, 12 
commodity,  see  Commodity 

analysis 
institutional  and  function- 
al, 7,  8 
market,  see  Market  analy- 
sis 

Andrews,  "Inland  Boat  Serv- 
ice," U.  S.  Department 
of  Agriculture,  1914, 
Bulletin  No.  74 

Antimony,  trade  organization 
chart,  84 

Appeal,  analyzing,  386-7 

Apples,  grades,  199 

Arbitrage,  48 

Asbestos,  28 

Associations,  trade,  214 
retail  trade,  239 

Associated  Advertising  Clubs, 
479 

Auction,  chart,  153 


487 


488 


INDEX 


Babson,  Annals  of  the  Ameri- 
can Academy  of  Politi- 
cal and  Social  Science, 
227 

Beans,  trade  organization,  72 

Bespoke  market,  320 

Bill  of  exchange,  251-4 

Bill  of  lading,  254-G4 

Blackberries,  price  spread, 
238 

Blacklists,  378 

Board  of  trade,  141-2 ;  Chicago, 
135 

Bobbs,  Merrill  and  Company 
v.  Strauss,  372 

Bond,  H.  L.,  testimony,  Pom- 
erene  Bill,  262 

Bonded  -warehouse,  168 

Boycott,  480 

Brace,  Value  of  Organized  Ex- 
changes, 138 

Brand,  Improved  Methods  of 
Handling  and  Marketing 
Cotton,  186 

British  Dominion  Royal  Com- 
mission, Report  of,  29 

Broker,  98 

for     manufactured     goods, 

329-30 
commission  to,  452-3 

Broom  corn,  trade  organization, 
73 

Broomhall's,  213-14 

Biicher,  Industrial  Evolution, 
91,  92 

Budgets,  307-10 

Building  materials,  price  chang- 
es, 458 

Bureaus,  Government.  See 
Commerce,  Crop  Esti- 
mates, Markets,  Statis- 
tics 


Business,  facts  and  principles, 
11-12 
letters,  438 
training,  411-12 
Butter,    and   Egg   Board,   135, 
146 
price  quotations,  240 
price  spread,  238 
prices,  chart,  234 
Buttons,   pearl,   prices   of   raw 
materials     and     finished 
goods,  458 
Buyer,  local,  94-6 
Buying,  cooperative,  358-9 


Cables,  215-16 

California  Fruit  Growers'  Ex- 
change, 104,  357.  See 
also  Oranges 

Capitalistic  function,  63 

Cars,  special,  125-6 

supply  and  routing,  126-8 

Cash,  discounts,  464-5 
sales,  248-9 

Catalogues,  advertising  media, 
442-3 

Cattle-loan  companies,  249 

Caveat  emptor,  364 

Central  station,  336 

Chain-store,  347-51 

Charges,  delivery  and  transfer, 
124-5 
demurrage,   128-9 
terminal,  124-5 
transportation,  465-6 

Cheese,  trade  organization,  74 

Check,   250-51 

Chemical  tests,  commodity,  32- 
3,  281-2 

Cherington,  The  Wool  Indus- 
try, 150,  174,  310,  460 


INDEX 


489 


Chicago  Board  of  Trade,  135, 

141 
Chiquoiue,  Public  Ledger,  Phil- 
adelphia, 52 
Classification  rates,  see  Rates, 

classification 
Clayton  Act,  470 
Clothing,  buying  considerations, 
290 
prices,  460 
selling  expense,  451 
Coal,  local  price,  229 
marketing,  96 
trade-organization       chart, 
81 
Coffee,  basic  grade,  145 

exchange,  145-6 
Cold  storage,  175-8 
Commerce,     history     of,     and 
commercial        problems, 
14 
Bureau     of    Foreign     and 
Domestic,  211.    See  also 
Interstate  Commerce 

Commission 
U.      S.      Department     of, 
482 
Commerce    and    Labor,    U.    S. 

Department  of,  482 
Commercial,    Economy    Board, 
shoe  standards,  390 
geography,  relation  to  com- 
mercial  organization,  4- 
5;  market  analysis  and, 
296-8 
law,  and  commercial  prob- 
lems, 14.    See  also  Laws 
organization,       1-2,       5-6; 
place  in  economic  proc- 
ess,   2-4;     diagram,    3; 
commercial       geography 
and.  4-5 


Commercial,  problems,  12-13 ; 
essential  equipment  for 
study  of,  12-15 

study,  educational  value,  15 
Commission,  agent,  32S 

jobbers'  and  brokers',  452-3 

merchant,  97-8 
Commodity,      advertising     and 
character      of,      429-30 
(Chap,  ii) 

analysis,  8 

raw  materials,  9,  21-41 

manufactured  goods,  10, 
277-94  (Chap,  xiii) 

characteristics,  22-6,  30-32; 
necessity  or  luxury,  23- 
4;  new  or  established, 
22-3;  perishable  or  non- 
perishable,  25-6;  prepa- 
ration requirements,  30- 
31;  speculative,  28;  sta- 
ple or  novelty,  24-5 

grading,  199-201,  292-3 

identification,  387-94 ;  by 
trade  names,  395-6;  by 
trade  marks,  396-9 
Commodity,  supply,  dependa- 
bility, 26-28;  control, 
28-9;  means  of  produc- 
tion, 34-36 ;  producing 
regions,  36-38;  volume 
of  production,  40;  "visi- 
ble supply,"  40 

tests,  32-3;  281-4 

units,  29-30 ;  advertising 
value,  387-91 

varieties,  species,  31-2 
Competition,  enforced,  470-71 

market,  49 

market  news  and,  220-21 

price  and,  365 

in  transportation,  114-15 


490 


INDEX 


Competition,  unfair,  377-9 
Conant,  Function  of  the  Stock 
and   Produce   Exchange, 
138 
Concentration  points,  see  Mar- 
ket, primary 
Conferences,   sales,  419-20 
Conditioning  house,  wool,  189 
Connective  function,  63 
Consumer,    demand,   and    mar- 
ket centers,  50,  53-5 
Containers,  use,  387-92 

deceptive,  471 
Control,  of  merchandising,  see 

Social  control 
Cooperative,  buying,  358-9 
organization,  104,  154-5 
store,  357-8 
Copyrights,  372,  397,  472 
Corn,  grades,  193-4 

price  spread,  238 
Costs,  and  prices,  244-6 

merchandising   and   prices, 

448-66  (Chap,  xxi) 
who  pays  for  advertising, 
453-5 
Cotton,  exchange,  142-5 

Futures  Act,  144-5,  180 
grading,  194-5 ;  basic  grade, 
143-4 ;  International 

Standards,  195 
International  Congress,  195 
International    Conventions, 

213 
market  centers,  45-6 
marketing  charges,  231-2 
price,   local,   229;    finished 
goods,  and  raw  materials, 

459 
storage  rates,  268 
trade  organization,  68 
warehouses,  171-3 


Cottonseed,  trade  organization, 

75-7 
Council    of    National    Defense, 

shoe  standards,  390 
Credit,  249-50;  functions,  270- 
71 
instruments,    250;    bill    of 
exchange,  251-4;  bill  of 
lading,     254-64 ;     check, 
250-51 ;     trade     accept- 
ance, 268-70 
warehouse  receipt,  264-8 
Men,  National  Association 

of,  377 
problem,  374-7 
Crop     Estimates,    Bureau    of, 
211 
reports,  210-11,  217 
Crops,  "catch  up,"  27 
Cryolite,  28 
Custom  order  market,  320 


Dealer  helps,  443 
Delivery  charges,  124-5 
Demand,  43 

consumer  and  markets,  50, 

53-5 
financial   and   trade  condi- 
tions, influence  of,  312- 
13 
market,    character   of,   50- 

52;  284-8 
seasonal,  56-7 
shifting,  53-4,  310-11 
Demonstrators,  443-4 
Demurrage,  128-9 
Department,    advertising,    413- 
14 
personnel,  407 
sales  promotion,  414 
store,  341-6 


INDEX 


491 


Departments,  government.  See 
Agriculture,  Commerce, 
Interior,   Justice 

Dick,  Henry  v.,  372 

Discounts,  464-5 

Distribution,  channels  of,  325- 
30;  costs,  see  Costs;  fi- 
nancing, 67-8,  248-71 
(Chap,  xii) 

Distributive  organization,   315- 
38  (Chap,  xv) 
character,  315-17 
choosing  proper,  330-32 
development,  317-25 
and  character  of  industry, 

319 
made    up    of    institutions 

and  functions,  316 
purpose,  316-17 
simplification,  324-25 
See  also  Marketing,  Mer- 
chandising,    Middlemen, 
Trade  organization 

Districts,  rate,  see  Rate  dis- 
tricts 

Dockage,  wheat,  191 

Dole,  C.  F.,  Atlantic  Monthly, 
90 

Draft,  see  Bill  of  exchange 

Drugs,  selling  expense,  451 

Dry  goods,  selling  expense, 
450 

Duncan,  C.  S.,  Commercial  Re- 
search, 169 

,  "Concentz-ation  in  the 

Marketing      of      Citrus 
Fruits,"  Community 

Leaflet     No.     20,     154, 
183 

,  -'Uniform  Bill  of  Lad- 
ing," Journal  of  Polit- 
ical Economy,  112,  131 


Economic,  goods,  types,  9 

theory,     and     commercial 
problems,  13 
Eggs,  market  centers,  46 

marketing,  69 

price  spread,  238 

prices,  chart,  234 

See  also  Butter  and  Egg 
Board 
Electrical  appliances,  trade  or- 
ganization, 336 
Elevators,  grain,  168-71 

public  utilities,  70 
Emery,  Speculation  in  the  Unit- 
ed States,  156,  157 
Exchanges,  organized,  65,  134- 
58  (Chap,  vii) ;  func- 
tions, 135;  opinion  of 
Judge  Grosscup  on,  13S; 
price  quotations,   239-40 

auction,  152-4 

Butter    and    Egg    Board, 
135,  146 

coffee,  145-6 

cooperative,  154-5 

cotton,  142-5 

grain,  140-42 

Iron   and    Steel   Institute, 
150-51 

municipal  markets,  155 

produce  exchanges,  138-40 

stock  yards,  146-9 

sugar,  151-2 

wool  market,  149-59 
Expenses,  see  Costs 


Factor,  99 

Farm  machinery,  selling  ex- 
pense, 451 

Farm  products,  marketing 
methods,  94-6 


492 


INDEX 


Farm   products,   trade   organi- 
zation ckaii,  71 

Fayant,     Some     Thoughts     on 
Speculation,  137 

Federal   Reserve    Board,    com- 
modity regulation,  2GG-7 

Federal      Trade      Commission, 
378-9,  481 

Field,  Retail  Buying,  290,  369 

Fighting  brands,  378 

Financial    conditions,    and    de- 
mand, 312-13 

Financing     distribution,     67-8, 
248-73    (Chap,  xii) 
See  also  Credit 

Finished  goods,  and  raw  mate- 
rials, 277-8 
See     also      Manufactured 
goods 

Fisher,    Elementary   Principles 
of  Economics,  227 

Five  and  ten  cent  stores,  350-51 

Flaxseed,    trade    organization, 
77-8 

Flour,  marketing,  330-31 
selling  unit,  388-9 

Flowers  and  ornamental  plants, 
trade  organization,  79-81 

Food,  Administration,  483 
stuffs,  see  Raw  materials 

Forestry,  Bureau  of,  212 

Fortney,    Lorain,     The    Ware- 
housing Industry,  160 

Forwarder,   97 

Freight  rates,  see  Rates;  Rate 
districts 

Fuel  Administration,  483 

Function,  capitalistic,  63 
connective,  63 
transportation,  65 
See   also   Trade  organiza- 
tion, functions 


Functions,  market,  and  institu- 
tions, 6-7,  61-4,  316 
Functionalized  middlemen,  62 
Furniture,       selling      expense, 
451 
trade  organization,  334-5 
Futures,  141-2,  219-20 

See  also  Price,  future 


Geography,     see     Commercial 

Geography 
Geological  Survey,  U.  S.,  212 
Goods,  economic,  types,  9 

finished,  and  raw  materials, 

277-S 
manufactured,  defined,  10, 
11 
Goodwill,  473 

Government,  influence  on  price, 
460-61 
reports,  see  Agriculture, 
Commerce,  Forestry,  Ge- 
ological Survey,  Weath- 
er Reports 
Grades,  31-2 

and  prices,  201-2 
standard,  responsibility  for, 

202-3 
of  apples,  199;  corn,  193- 
4;   cotton,   194-5;    hides 
and    skins,    197-8;    lum- 
ber, 198-9 ;  potatoes,  195- 
7;  wheat,  190-93 
Grading,  65-6,  183-203   (Chap, 
ix),  292-3 
effect,  on  commodity,  199- 
200;  on  trade  organiza- 
tion, 201 
machinery  for,  188-9 
packing  and,  203 
regulation,  266-7 


INDEX 


493 


Grading,  scientific  analysis  as 
basis,  187-8 

Grain,  elevators,  70,  168-71 
exchanges,  140-42 
Standards  Act,  U.  S.,  190- 
93 

Granger  movement,  109 

Groceries,  selling  expense, 
450 

Grosscup,  Judge,  opinion  re- 
garding organized  ex- 
changes, 138 

Gutta  percha,  28 


Hadley,  Railroad  Transporta- 
tion, 260 

Hardware,      selling      expense, 
451 
trade  organization,  333-4 

Harvard  University,  Bureau  of 
Business  Research,  Bul- 
letin No.  5,  236 

Hedging,  142 

Hess,  Productive  Advertising, 
452 

Hides  and  skins,  grades,  197-8 

Holmes,  Cold  Storage:  Busi- 
ness Features,  176 

,  Systems  of  Marketing 

Farm  Products,  99 

Hosiery,  trade  organization, 
332 

House  organs,  437-8 

Huckleberries,  price  spread, 
238 

Huebner,  Agricultural  Com- 
merce, 46,  222 

,  Annals  of  the  Amer- 
ican Academy  of  Politi- 
cal and  Social  Science, 
134 


Illinois  Warehouse  Law,  70 
Incomes,    in    market    analysis, 

306-7 
Industrial,  chemistry,  32-3,  281- 

2 

Commission,  Report  of  the, 
45,  94,  170 
Institute,  Iron  and  Steel,  150- 

51,  214 
Institutions    and    functions,    6, 

61-4,  316 
Instruments,  financial,  see  Cred- 
it instruments 
Insurance,  in  storage,  163 
Interior,  U.  S.  Department  of, 
Bureau  of  Forestry,  212 
Geological  Survey,  212 
International,  Agricultural  In- 
stitute, 212,  213 
conventions,  213 
Cotton,  Congress,  195 
Interstate,  Commerce  Act,  470 
Commerce  Commission,  481 
Iron,  pig,  market,  47 

trade    organization     chart, 
82 
Iron  and  Steel  Institute,  150- 
51,  214 


Jewelry,  selling  expense,  451 
Jobber,  98-9 

commission,  452-3 
Justice,  Department  of,  481-2 


Kellogg's  Toasted  Cornflakes, 
United  States  v.,  372 

Kiely,  The  Middleman  in  Prac- 
tice, 99 

King,  "A  Study  of  Trolley 
Light   Freight   Service," 


494 


INDEX 


Annals  of  the  American 
Academy  of  Political 
and  Social  Science,  129, 
237 


Law,  commercial,  see  Commer- 
cial  law 

Laws,  and  merchandising,  470- 
75,  476-7 

Lead,  market  centers,  47 

Leather,  market  centers,  47 
prices,  459-60 

Letters,  business,  438 

Levine,    Marketing    of    Wrap- 
ping Paper,  284,  333 

License  of  sale  rights,  372 

Line  elevators,  see  Grain  eleva- 
tors 

List  price,  464 

Livestock,  prices,  232-3 

see  also  Cattle-loan  com- 
panies 

Loans,  to  growers,  249 

Lumber,  grading,  198-9 

Luxury,  defined,  23-4 


Magazines,  435-7 

market,  214 
Mail-order  house,  351-55 

selling  expense,  451 
Manufactured    goods,    277-485 
(Chaps,  xiii-xxii) 

analysis,     277-92      (Chap, 
xiii) 
Manager,  advertising,  416-17 

sales,  406-7 
Manganese,  use,  28 
Margin,  see  Prices,  spread 
Market,  defined,  42 

analysis,  42-59  (Chap,  iii) ; 


manufactured  goods, 
295-313  (Chap,  xiv) ; 
climatic  considerations, 
56 ;  financial  and  trade 
conditions,  312-13 ;  his- 
torical considerations, 
53-56,  298-300;  human 
element,  313 ;  popula- 
tion, 303-10 ;  seasonal 
considerations,  56;  social 
element,  301-3 ;  trade 
geography  and,  296-8 ; 
units,  buying,  300-301 
Market,  areas,  48-9,  51 

centers,  43-50;  53-55;  and 
consumer  demand,  50, 
53-55 ;  function,  45-6 ; 
geographical  location, 
43-48;  kinds,  43-4 

character  of,  52-3 ;  and  ad- 
vertising, 430-32 

competition,   49-50 

defending  and  extending, 
384-404  (Chap,  xviii) ; 
problems  of  extension, 
385-6 

interior,  45 

demand,  see  Demand 

finance  and,  57-58 

future,  141-2 

local,  defined,  43-4;  buyers 
and  sellers  in,  94;  trans- 
portation to,  110-13 

manufactured  goods,  form 
and  scope,  311-12 

municipal,  155 

news,  66,  205-7;  as  a  busi- 
ness force,  222-3;  cables, 
for  carrying,  215-16 ; 
central  organizing  force, 
207-8;  competition  and, 
220-21;  control,  218-19; 


INDEX 


495 


essentials,  217-18;  func- 
tions, 207-9,  222-3;  mag- 
azines, 214 ;  organiza- 
tions for  securing,  209- 
217 ;  ticker,  use  for,  216 ; 
use  and  abuse,  221-2 

potential,  401-2 

publications,  214 

price,  66-7,  225-47  (Cbap. 
xi);  local,  228-30;  pri- 
mary and  terminal,  231- 
5;  and  volume  of  out- 
put, 40;  see  also  Price. 

primary,  defined,  44 ;  trans- 
portation to,  113-17 

scope  and  character,  385-6 

South  Water  Street,  139 

spot,  141 

terminal,  defined,  434 ; 
transportation  to,  117 

units,  300-301 
Marketing,  and  finance,  248 

problem,  105 

strategic  points,  69-70 
Markets,  Bureau  of,  211 
Martin,   S.   O.,   Annals   of  the 
American    Academy     of 
Political  and  Social  Sci- 
ence, 243 
Materials,  pivotal,  28 

See  also  Raw  materials 
Merchandising,  costs  and  prices, 
448-66  (Chap,  xxi) ;  and 
social  control,  469-84 
(Chap,  xxii) 
Middleman,  64,  87-105  (Chap, 
v),  325-30 

elimination  of,  82,  103-5 

in  English  trade,  62-3 

functionalized,  7,  62 

functions,  development,  88- 
94 


Middleman,  justification,  100- 
101 

Miles  Medical  Company  v. 
Piatt,  372 

Milk,  market  centers,  46 
marketing,   95-6 
prices,  229,  233 

"Minerals,  strategy  of,"  28 

Mitchell,  History  of  Prices 
During  the  War,  235, 
237,  239,  244 

Motor-truck  lines,  130 

Moulton,  Principles  of  Money 
and  Banking,  251 

Municipal  markets,  155 

Murchison,  Resale  Price  Main- 
tenance, 374 

MacMartin,  Planning  an  Ad- 
vertising Campaign  for 
a  Manufacturer,  285,  313 

McPherson,  Railroad  Freight 
Rates,  110,  121,  260,  264 


National  Association  of  Cred- 
it Men,  377 

Natural  resources,  location,  36- 
40 

Necessaries,  defined,  23-4 

Negotiable  Instruments  Law, 
Uniform,  265 

Newspapers,  433-5 

Notions,  selling  expense,  450 

Novelty,  defined,  24-5 

Nystrom,  Economics  of  Retail- 
ing, 324,  450 


Oranges,     marketing     charge, 
232 
See  also   California  Fruit 
Growers'  Exchange 


496 


INDEX 


Organization,  business,  defined, 
1 
commercial,  defined,  1 
cooperative,  104,  154-5 
distributive,    see    Distribu- 
tive organization 
industrial,  defined,  1 
sales,  405  (Chap,  xix) 
trade,  see  Trade  organiza- 
tion 


Package,  use,  387-92 
deceptive,  471 

Packing,  grading  and,  203 
regulation,  266-7 

Paper,  selling  expense,  451 

wrapping,  trade  organiza- 
tion, 333 

Parcel  Post,  selling  by,  104-5 

Parlin,  C.  C,  quotation  from 
address  by,  300 

Patent,  397,  472;  rights,  372 

Peanuts,  market  centers,  47 

Pearl  buttons,  458 

Pennington,  M.  E.,  Annals  of 
the  American  Academy 
of  Political  and  Social 
Science,  175,  178 

Personnel  department,  407 

Petroleum  Institute,  214 

Pig  iron,  market,  47 

trade-organization  chart,  82 

Pivotal  materials,  28 

Plant,  or  store,  appeal  asset, 
399-401 

Policies,        business,        362-83 
(Chap,  xvii) 
house  or  store,  362-4 
one  price,  464 

Political  divisions,  and  market 
areas,  43,  51-2 


Pomerene  Bill,  258,  261-3 
Population,      movements,      53, 
303-4 

analysis,  304-6 
Porter,  The  Bill  of  Lading,  261 
Ports,  cotton,  functions,  46 
Potatoes,  grades,  195-7 

price  spread,  238 
Poultry,  price  spread,  238 
Powell,  Western  Fruit  Jobber, 

232,  233 
Price,  calculating,  368-9 

causes  affecting,  225-8 

control,  243-4,  475-6 

cutting,  379-81 

discounts,  464-5 

fair,  244 

fixing,  243-4,  245 

future,  231-2 

influences,  456 

intervals,  241,  368 

list,  464 

maintenance,  369-70;  com- 
mercial phase,  370-72 ; 
legal  phase,  372-4 

market,  see  Market  price 

policies,  464 

problem,  364 

and  profits,  463-4 

quotations,  239-41 

resale,  371 

system,  230-231,  235,  462- 
3 

See  also  Market  price 
Prices,  competition  and,  365 

costs  and,  244-6,  448-66 
(Chap,  xxi) 

effect  of  war  on,  237 

grades  and,  201-2 

retail,  235-9 

seasonal,  465 

speculative,  231,  465 


INDEX 


497 


Prices,  "spread,"  242-3;  table, 
238 
standardizing,  367-8 
sympathetic,  241-2 
transportation  charges  and, 

465-6 
wholesale,  230-35 
Principles,  business  facts  and, 

11-12 
Produce     exchanges,      138-40 ; 

price  quotations,  240 
Producing  regions,  36-39 
Product,  see  Commodity 
Production,  and  supply  of  com- 
modity,  34-40 
Products,  farm,  see  Farm  prod- 
ucts, 
Profits,  and  price,  463-4 

limiting,  480 
Public  utilities,  476 
Publications,  market,  214 
Purchasing,     agent,     qualifica- 
tions, 289 
plan,  288-91 
Pure  Food  and  Drug  Act,  186, 
471 


Quebracho  wood,  28 
Quotations,  239-41 


Railroad  Administration,  483 

Rate  districts,  117-22 

Rates,  classification,  122-3 
commodity,  123-4 

Raw    materials,    1-273    (Chap, 
i-xii) 
analysis,  21-41  (Chap,  ii) 
and  finished  goods,  277-8 
difficulty       of       applying 
standards,  10 


Raw     materials,     and     prices, 

456-9 
Rebates,   378 

Receipt,  warehouse,  264-8 
Records,  sales,  415-16 
Resale  price,  371 
Research,       and       commercial 

problems,  12 
organizations,   213-17,   419 
Retail,  prices,  235-9 

trade,  101-2;   associations, 

239 
Retailer,  development  of,  101- 

3 
new   type,   340-60    (Chap. 

xvi) 
Rights,  protection,  472-3 
Ripley,  W.  Z.,  Railroad  Rates 

and  Regulations,  114 
Rogers,  E.  S.,  Outline  of  Laio 

of  Trade-marks,  473 
Ruggles,  C.  O.,  Quarterly  Jour- 
nal  of   Economics,   128, 

129 


Sales,  cash,  248-9 

conferences,  419-20 

conventions,  413 

force,  selecting,  407-9 ; 
training,  409;  payment, 
452 

manager,  406-7 

methods,  248-50 

promotion  department,  414 

talks,  411 

organization,  405-4L';') 

(Chap,  xix) 

records,  414-15 
Salesmanship,   420-22 
Salesmen,  421-2 

i9ce  also  Sales  force 


498 


INDEX 


Sainrnons,    Keeping    up    with 

Rising  Costs,  450 
Schools,  business,  411-12 
Seasonal,   prices,  465 

products,  26-28 
Secret-process  rights,  372 
Selling,  expense,  449-52 

medium,  selection  of,  385-7 
Sherman  Anti-Trust  Act,  372, 

373,  470 
Shoes,  selling  expense,  451 

standards,  390 
Silk,  prices,  459 

tests,  283-4 
Smith,    Strategy    of    Minerals, 

223 
Social  control,  and  merchandis- 
ing, 469-85  (Chap,  xxii) 

forces,  469-70 

by  law,  470-75 

machinery,  481-3 
Social  control,  methods,  476-81 

boycott,  480 

example,  477-8 

group  action,  478-9 

legislation,  476-7 

license  or  examination,  477 

limiting  profits,  480 

publicity,  479 

suggestion,  480-81 

taxation,  477 
South    Water    Street    Market, 

135-9 
Southern  Pine  Association,  19S- 
9 ;     standard     specifica- 
tions of,  198 
Special  cars,  125-6 
Speculation,  problem,  155-7 
Speculative,  commodities,  28 

prices,  231,  465 
Spread,  in  prices,  242-3;  table, 
238 


Standardization,  of  prices,  367- 
8 
and  identification,  of  com- 
modity, 393-4 
Standards,  living  and  market 
53-4 
commercial  units  and,  1S9- 

90 
need  of  uniform,  183-4 
protecting,  471-2 
Staple,  defined,  24-5 
Statistics,       and       commercial 
problems,  13 
Bureau  of,  211 
Stephens  Bill,  372 
Stock,  exchange,  135 
plan,  288-91 
rooms,  178-9 

Yards,    135,    146-9;    price 
quotations,  240 
Stone,  crushed,  market,  46-7 

prices,  458 
Storage,  163 
cold,  175-8 
cotton,  268 
regulation,  266-7 
See  also  Warehouses 
Store,  appeal  asset,  399-401 
chain,  347-51 
cooperative,   357-8 
department,  341-6 
five  and  ten  cent,  350-51 
manufacturer's  branch,  355- 
7 
Strategic  points  in  marketing, 

69-70 
"Strategy  of  minerals,"  28 
Street-car  advertising,  439-41 
Study  of  commercial  problems, 

educational  value,  15 
Style,  and  prices,  460 
Substitutes,  29,  55 


INDEX 


499 


Sugar,  beets,  market,  47 

cane,   market   centers.   47; 
trade-organization  chart, 
83 
exchange,  151-2 
Equalization  Board,  151 
Sumner,  Folkways,  316 
Supply,   of  commodity,   26-29, 
33-41 
and      routing,      of      cars, 
126-8 
Sympathetic  prices,  241-2 


Tariff,  461 

Taste,  habits,  etc.,  and  market. 

53 
Taxation,   as   control   of   busi- 
ness, 477 
Tea,  receiving  ports,  47 
Telegraph,  215 
Tests,    of    commodities,    32-33, 

281-4 
Textiles,  classes,  297 
Ticker,  142,  216 
Timken  Magazine,  111 
Tipper,     Hollingsworth,      etc., 
Principles   and  Practice 
of  Advertising,  435 
Tobacco,  prices,  457-8 
warehouses,  174-5 
Tomatoes,  price  spread,  238 
Trade,  acceptance,  268-70 

associations,     214;     retail, 

239 
center,  see  Market  center 
conditions,     and     demand, 

312-13 
information,   205-224 

(Chap,  x) 
marks,  396-9,  472-3 
names,  395-6 


Trade,  organization,  61-85 
(Chap,  iv) ;  chaos  in, 
337-8 ;  charts,  71,  81,  82, 
83,  84 ;  commodity,  modi- 
fied by,  68-9;  flexibility, 
82-84;  functions,  62-68; 
grading,  effect  of,  199- 
201;  types,  72-81,  332-7; 
see  also  Distributive,  Or- 
ganization, Marketing, 
Middlemen 

retail,  101-3 

wholesale,  buyers  and  sell- 
ers in,  97-101 
Transportation,      65,      107-133 
(Chap,  vi) 

cars,   125-8 

chai'ges,  delivery  and  trans- 
fer, 125 ;  demurrage,  128- 
9;  finished  goods,  465-6; 
terminal,  124-5 

commercial  problem,  107- 
110 

to  market,  local,  110-13; 
primary,  113-17;  termi- 
nal, 117 

motor-truck  lines,  130 

rate  districts,  117-22 

rates,   classification,   122-3 

trolley  lines,  129-30 

water,  116,  117 
Trolley  lines,  129-30 
Truck,  motor,  lines,  130 

transportation      to      local 
market,  111-12 
Typewriters,     trade    organiza- 
tion, 335-6 


Underwear,  selling  expense, 
451;  trade  organization, 
332-3 


500 


INDEX 


Uniform      Negotiable     Instru- 
ments Law,  265 

Union  Stock  Yards,  135 

U.  S.  Grain  Standards  Act,  190- 
93 

U.  S.  Shipping  Board,  482 

U.    S.   Warehouse  Act,   264-5, 
180 

Units,  commercial,  183-4,   189- 
90 
commodity,    29-30 ;    adver- 
tising value  of,  387-92 

Usher,  American  Economic  Re- 
view, 157 


Varieties,  of  commodity,  31-32 

Victor  Talking  Machine  Com- 
pany v.  R.  H.  Macy 
Company,  372-3 

Visible  supply ,  40,  217 

Von  Phul,  Physical  Character- 
istics of  Cotton  Ware- 
houses, 173 


Wadsworth,  Advertising,  281 
War,  effect  on  prices,  237 
Industries  Board,  483 
Trade  Board,  482-3 
Warehouse,  159-82  (Chap,  viii) 
Act,  U.  S.,  180,  264-5 
in  commercial  organization, 

180 
economic  advantage,  165-6 


Warehouse,  functions,  163-5 

Law,  Illinois,  70 

receipt,  264-7 
Warehouses,  types,  65,  166 

bonded,  168 

cold  storage,  175-8 

cotton,  171-3 

general  mercantile,  166-8 

grain  elevator,  168-71 

stock  rooms,  178-9 

tobacco,  174-5 

wool,  173-4 
Warehousing,  65 

recent   developments,   159- 
63 

problems,  179-80 
Weather,  and  prices,  461-2 

Report,  Daily,  212 
Webb  Bill,  470 

Weld,   Marketing  Farm  Prod- 
ucts, 95,  116 

,    Quarterly   Journal   of 

Economics,  329 
Westerfield,  Middlemen  in  Eng- 
lish Business,  62,  63,  87, 
89,  90,  102 
Wheat,  dockage,  191 

grades,  190-93 

focal  price,  228-9 
White  lists,  378 
Wholesale  prices,  230-35 
Wholesaler,  96-97 
Wool,  conditioning  house,  189 

market,  149 

market  centers,  44-45 
Woolen  cloth,  buying,  288-90 


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